You enjoy treating employees with the occasional gift, office snack, or meal compensation. These little things help boost employee morale and productivity and can be great for showing them your appreciation.
But you may also be wondering about the de minimis rule. Are those employee gifts taxable? How will you know, and how do you report them?
While employers often give out these employee perks with the best intentions, they must understand when and how those benefits need to be reported.
Let’s take a closer look at employee fringe benefits and the de minimis rule. We’re breaking down:
- The de minimis definition
- Examples of de minimis fringe benefits
- Examples of excluded benefits
- Qualifying de minimis value
- How to report fringe benefits
It doesn’t have to be complicated or create a lot of extra work for your HR team at the end of the year! As long as you have a clear understanding of this rule and its requirements, you can ensure that employees are appropriately taxed.
What is the De Minimis Rule?
The de minimis rule applies to any property or service with a value so small that accounting for it is unreasonably or administratively impractical. Two key factors are used to classify de minimis benefits:
- Value: Typically calculated by fair market value
- Frequency: How often the employer provides the benefits to employees
Essentially, a de minimis benefit needs to be occasional or unusual in frequency. And—this may seem obvious—but it must not be a form of disguised compensation.
This can be somewhat of a gray area since whether or not a benefit is considered de minimis depends on all of the facts and circumstances.
Examples of De Minimis Fringe Benefits
Examples of de minimis benefits, according to the Internal Revenue Service (IRS), include:
- Controlled, occasional employee use of photocopier
- Occasional snacks, coffee, doughnuts, etc.
- Occasional tickets for entertainment events
- Holiday gifts
- Occasional meal or transportation expenses for working overtime
- Company life insurance for employee spouse or dependent with face value of $2,000 or less
- Flowers, fruits, books, etc., provided under certain circumstances
- Personal use of a cell phone provided by an employer primarily for business purposes
Before you go handing out season tickets for everyone’s favorite team, check the rules for achievement awards. When awarding things like the length of service or safety, the IRS states that awards:
- Must be tangible, personal property.
- Cannot be disguised as wages.
- Must be awarded as part of a meaningful presentation.
- Cannot be cash, cash equivalents, vacation, meals, lodging, season theater or sports tickets, or securities.
There are also several other requirements and dollar limitations that awards must meet to be excludable. Check out the full IRS Fringe Benefit Guide.
Excluded Fringe Benefits
If a benefit is too valuable or given too frequently, it will not qualify as de minimis. This means that the total value of the item or service is taxable to the employee—not just the excess over a designated de minimis amount (because there is no maximum dollar amount).
SHRM notes that some benefits that do not qualify for the de minimis rule include:
- Sports or theater season tickets.
- Use of a company vehicle to commute more than one day a month.
- Membership in a private country club or athletic facility.
- Use of employer-owned or leased facilities (e.g., apartment, hunting lodge, boat, etc.) for a weekend.
Cash cannot be a fringe benefit because it:
- Is generally distributed as a wage.
- Does not create unreasonable accounting or administrative work (because the value is evident).
There is one exception: occasional meal and transportation money to enable an employee to work overtime. In other words, the employee receives the money so they can work an unusual, extended schedule.
Gift certificates are considered a cash equivalent, so they are typically excluded from the de minimis rule. General merchandise gift cards do not qualify and are taxable. The IRS would consider as little as a $5 gift card to a general retailer as employee income.
Again, there is one exception: a gift certificate that an employee can exchange for a specific, tangible item. The gift certificate must still be of low value and frequency and impractical to account for.
If you’re unsure whether a particular item meets the de minimis rule, err on the side of caution and include the value of all gift cards and gift certificates in employee wages.
Is There a Maximum De Minimis Value?
Since there is no specified dollar amount in any government regulations or IRS guidance, it can be tricky determining which items or services are considered de minimis fringe benefits. Examples given range widely in value.
The IRS has advised that benefits of $100 and $109 do not qualify as de minimis. While some employers use a $25 or $50 value for classifying something as de minimis, there is no support for a set value.
How Do I Report Fringe Benefits?
When a benefit falls under the de minimis rule, you do not have to report it.
If fringe benefits are taxable, they should be included on all applicable employees’ Form W-2 and subject to income tax withholding (this also goes for social security and Medicare benefits). Employers can report any of this information in box 14 on the W-2.
If you have any questions or need additional guidance with correctly reporting employee gifts, our dedicated team of HR specialists will be happy to walk you through it. Contact BlueLion at 603-818-4131 or firstname.lastname@example.org today!
The information on this website, including its newsletters, is not, nor is it intended to be legal advice. You should contact an attorney or HR specialist for advice on your individual situation.