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:
- Personal use of an employer-provided vehicle
- Gym memberships
- 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.