We provide every employee with a gift certificate of $20 on his or her birthday that can be used at a nearby restaurant. We have always assumed that these gifts are not taxable income, and so we have not included them on employees' W-2 forms at the end of the year. But a few staff members insist that this is a taxable fringe benefit. Who is correct?
In general, a de minimis benefit is one for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical. De minimis benefits are excluded from tax under section 132(a)(4) of the tax code and include:
- Occasional employee use of photocopier
- Occasional snacks, coffee, doughnuts, etc.
- Holiday gifts
- Occasional meal money or transportation expense for working overtime
- Flowers, fruit, books, etc., provided under special circumstances
- Personal use of a cell phone provided by an employer primarily for business purposes
In determining whether a benefit is de minimis, you should always consider its frequency and value. An essential element of a de minimis benefit is that it is occasional or unusual in frequency. It also must not be a form of disguised compensation.
Whether an item or service is de minimis depends on all the facts and circumstances. In addition, if a benefit is too large to be considered de minimis, the entire value of the benefit is taxable to the employee, not just the excess over a designated de minimis amount. 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.
Cash cannot be a de minimis fringe benefit since accounting for it is never unreasonable or impractical. An exception is provided for occasional meal or transportation money to enable an employee to work overtime. The benefit must be provided so that the employee can work an unusual, extended schedule. The benefit is not excludable for any regularly scheduled hours, even if they include overtime. The employee must actually work the overtime. Meal money calculated on the basis of number of hours worked is not de minimis and is taxable wages.
Gift certificates that are redeemable for general merchandise or have a cash equivalent value are not a de minimis benefit and are taxable. But the IRS maintains that "a certificate that allows an employee to receive a specific item of personal property that is minimal in value, provided infrequently, and is administratively impractical to account for, may be excludable as a de minimis benefit, depending on facts and circumstances."
If a benefit qualifies for exclusion, no reporting is necessary. If it is taxable, it should be included in wages on Form W-2 and is subject to income tax withholding (unless exempt, as in the case of a minister who has not elected voluntary withholding). If the employees are covered for Social Security and Medicare, the value of the benefits is also subject to withholding for these taxes. Again, this is not true for ministers with respect to compensation received from the exercise of ministry. As to such services, ministers are self-employed for Social Security and pay the self-employment tax.