Gift Giving & Taxes

The holiday season is nearly here, and you might be starting to think about gift giving this year. If you’re planning on thanking your employees for their great work throughout the year with gifts, or maybe even a holiday party, there are a few tax rules you should keep in mind.

In general, all types of compensation are subject to income tax – unless excluded by the tax code.

De Minimis fringe benefits may allow employers to provide holiday gifts of property – not cash or cash equivalents – with a low fair market value, without the employee having to pay additional taxes on the gift. De Minimis (reminder found here) in simple terms refers to something too minor or small to be considered. In other words, it is something small enough it is not practical to track or administer the value and has little to no impact on the employees’ income.

The frequency and availability of these gifts can determine whether or not they are considered de minimis.  As a general rule, as long as all employees are receiving the same gifts, the frequency isn’t an issue.

Some items that do qualify as de minimis fringe benefits and gifts – and are therefore excludable from income tax – include:

  • Traditional holiday gifts with a low fair market value. This includes your turkeys, hams or any other small non-cash
  • Occasional cocktail parties – this means your company holiday party, employee picnics, etc.
  • Occasional sporting event or theater tickets.
  • Occasional coffee, donuts and snacks in the office.
  • Special occasion gifts, such as sympathy flowers.

Each of the above items include a time frame… occasionally. These small gifts are considered excludable as long as they are not being given on a regular or excessive basis.

Now that we know what is excludable, let’s take a look at what is considered taxable.

The larger the gift, the better the chance it is taxable compensation. For example, if you’re considering giving your employees season tickets to see their favorite football team, those tickets are considered taxable and must be reported as income.

Other examples of taxable gifts include:

  • Gifting your employee a weekend away at an employee-owned facility, such as a hunting cabin or timeshare.
  • Providing your employee a membership in a country club or a gym.
  • Allowing your employee to use a company vehicle for commuting or other personal use more than one day a month.

Some employers provide some of these benefits throughout the year, while others may give them for the holidays. If you’re planning on giving any of these gifts, make sure you include them as income!

You might have noticed we haven’t touched on a very common gift employers give for the holidays – gift cards, gift certificates and even cash.

When it comes to gift cards, certificates and cash, the rule is pretty straightforward: no matter how large or small the amount, it will always be taxable (with a few small exceptions of course). If you’re thinking of giving your employee a $5 Target gift card or even a $500 general use gift card, you guessed it – it must be reported!

The moral of the story? Pay attention to the value of your gifts to make sure you’re in compliance. If you want to give your employees great gifts but aren’t quite sure what you should be reporting, let us know. We are here to help you and your employees have a great holiday season!

Fringe Benefits: What You Need to Know

As an employer, you want to ensure your employees are happy and thriving in your business. From time to time, you may even reward them for a job well done. But before you give a reward that’s outside the scope of their pay rate, think twice.

Welcome to the world of fringe benefits.

What are fringe benefits?

Fringe benefits are any form of payment that is considered compensation beyond your employee’s normal pay rate. This could include property, services or cash.

Why do I need to think twice?

Often, fringe benefits are taxable to the employee. And if it’s taxable, you have to report it on the employee’s W-2.

Fringe benefits that are taxable include:

  • Vacations
  • Personal use of an employer-provided vehicle
  • Gym memberships
  • Bonuses
  • Moving expenses (those in excess of your qualified expenses)
  • Group term life insurance
  • Gift cards

This is by no means an exhaustive list, but it should at least get you thinking.

What else do I need to know?

When we talk about fringe benefits, we’re often talking about value. The IRS has a little rule called de minimis fringe benefit, otherwise known as “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.”

In other words, when you talk about value in regard to de minimis fringe benefits, if the benefit is so small it makes reporting it impractical, you don’t have to worry about it. And before you ask, there’s no specific dollar amount given.

One thing to remember is that cash or cash-equivalent gifts are NEVER non-taxable. For example, gift cards have an easily ascertainable value and can be redeemed for merchandise or a cash equivalent. So they need to be reported as part of an employee’s wages.

If you give items that are not cash, you will more than likely utilize fair market value. For instance, say you have a drawing during your company holiday party and an employee wins a 60 inch TV. This would not be considered de minimis and would need to be included in their income so taxes could be withheld. In this instance you can easily ascertain the value of the TV.

In the above example, you utilize fair market value. However, there are items that don’t have an easily discernible value. In that case, look at what a willing buyer would pay for that particular item. If you need a little more help, the IRS lays out guidelines for the valuation of certain items, like the lease of an employer-provided vehicle. You can find more information on that here.

So what would be considered de minimis?

So what would be considered de minimis? An example would be giving each of your employees a T-shirt, turkey, or something similar in value. The key here is that it HAS to be something tangible (as a reminder, this doesn’t mean cash or anything with a value attached … even a $5 gift card counts).

The moral of the story?

Fringe benefits are a great way to reward your employees and help you stand out from your competition. However, you need to be careful that you’re actually reporting these benefits as part of your employee’s wages.

De Minimis Threshold: A Lesson in Latin & the IRS

Recently, the IRS updated the de minimis threshold for taxpayers without an applicable financial statement (AFS). Confused? Trust us, this is a good thing.

First, a Latin lesson. De minimis is a Latin expression meaning “about minimal things.” So what does this have to do with the IRS? Well a de minimis threshold is the lowest payment value required to count toward payments on a given project. In other words, if the value of a payment is under the de minimis threshold, it does not have to be reported.

So what’s with the IRS’ change of heart? Well several taxpayers made sure to let the IRS know that the previous threshold ($500 on a per-invoice or per-item basis) wasn’t really working for them. They even gave a few reasons: (1) the threshold was too low to truly reduce the administrative burdens of complying with the repair regulation requirements for small taxpayers (read, it caused a lot of time and paperwork without adding any real value), and (2) the amount paled in comparison to the $5,000 safe harbor provided for taxpayers who have an AFS.

And now a financial lesson. An applicable financial statement (AFS) is one prepared in accordance with U.S. Generally Accepted Accounting Principles. In other words, it’s something your accountant helps you do. And no, not all businesses need one. Here’s a refresher on why you might. 

The change, effective January 1, 2016, raises the de minimis threshold to $2,500 on a per-invoice or per-item basis for taxpayers without an AFS. It’s effective for expenditures incurred in taxable years beginning January 1, 2016. This change will simplify record-keeping requirements for small businesses. In other words, the IRS just made your life a little bit easier. Happy New Year.

De minimis

Want to know more? This change is great and all, but with it comes new elections and policies and procedures that need to be put in place effective January 1, 2016. So make sure to chat with a tax specialist about how to implement this in your organization. What, you thought it would be easy? Have we taught you nothing about taxes so far?