With the holidays upon us, you may want to show your appreciation for your employees' hard work, but before you begin shopping, it's a good idea to consider the tax implications of your generosity. Otherwise, a well-meaning gift could end up having the opposite of the desired effect when the employee receives a tax surprise on your gift.
Generally, anything of value that you give to an employee is included in the employee's taxable income. There is a limited exception for certain "de minimis" fringe benefits where the value is so small as to make accounting for it unreasonable or administratively impracticable, after taking into account how frequently you provide similar benefits to your employees.
Examples of de minimis fringe benefits that are excludible from income:
- Traditional holiday gifts of property (not cash) with a low fair market value (e.g., hams, turkeys, etc.)
- Occasional theater or sporting event tickets
- Occasional snacks, coffee, doughnuts, etc.
- Occasional cocktail parties, group meals, or picnics for employees and their guests
- Flowers, fruit, books, etc., provided under special circumstances (e.g., on account of illness, outstanding performance, or family crisis)
Examples of de minimis fringe benefits that are includible in income:
- Cash gifts and cash equivalents (e.g., general use gift cards or gift certificates)
- Season tickets to sporting or theatrical events
- Use of employer-owned or leased facilities (e.g., apartment, vacation home, boat, etc.)
- Membership in a country club or athletic facility
- Commuting use of an employer-provided vehicle for more than one day per month
Determining whether a holiday gift is excludible from employee income as a de minimis fringe benefit depends on the facts and circumstances. The IRS cautions that you should always consider frequency (to be excludible, a gift must be occasional or unusual in frequency) in addition to the gift's value.
Unfortunately, there is no bright-line dollar amount as to what qualifies as de minimis. The IRS has ruled previously in a particular case that items with a value exceeding $100 could not be considered de minimis, even under unusual circumstances.
Given the uncertainty in this area, the conservative approach would be to include any holiday gifts in your employees' income no matter how insignificant the value, assuming it is possible to easily track or determine the values and recipients of such gifts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.