Review of De Minimis Fringe Benefits
Posted on October 01, 2011
Many employers use de minimis fringe benefits as a way of gift-giving or providing incentives to employees, oftentimes to positively reinforce behavior and enhance performance. However, some incentives do not actually satisfy the IRS regulations to qualify for the tax-free implications of a de minimis benefit. Perhaps it’s time to review your rewards and recognition practices and determine whether you are adhering to the guidelines outlined under Internal Revenue Code.
According to the IRS, a de minimis benefit is one that is occasional or unusual in frequency, and is so small as to make accounting for it unreasonable or impractical. A de minimis benefit is not taxed; as such, it cannot be a disguised form of compensation. The value of a benefit may be considered too large to be de minimis of it exceeds $100, even under unusual circumstances.
Cash is generally intended as a wage, and usually provides no administrative burden to account for. Cash therefore cannot be a de minimis fringe benefit, with one exception: Occasional meal or transportation money to enable an employee to work overtime. (See the IRS for details.)
Cash or cash equivalent items provided by the employer are never excludable from income. An exception applies for occasional meal money or transportation fare to allow an employee to work beyond normal hours. Gift certificates that are redeemable for general merchandise or have a cash equivalent value are not de minimis benefits and are taxable. However, a certificate that allows an employee to receive a specific item of personal property that is minimal in value, is provided infrequently, and is administratively impractical to account for, may be excludable as a de minimis benefit, depending on facts and circumstances.
For example, an employee receiving a $10 gift card to Subway must have this accounted for as a form of income. However, a gift certificate for two “Foot Long Sandwiches” would qualify as a de minimis benefit. A $25 gift card to Big O Tire is a cash equivalent and taxable; a gift certificate for a car safety and emissions inspection would be de minimis (non-taxable). If your organization typically provides gift cards as incentives, perhaps it may be time to up the Anny on creativity – and avoid tax implications. Otherwise, you should start reporting gift cards as compensation and taxing the employee appropriately.
If you are unsure about whether your current pay practices are legitimate, please visit www.irs.gov or contact your ESG Human Resources Consultant at 888-810-8187.