Employee Gifts, Taxes And Holidays
Written by David Park, Regulatory Compliance Counsel, NAFCU
Now that we are into the holiday season – with Christmas eighteen days away, Hanukkah ending in three days and Kwanzaa beginning in nineteen days – there are certain things that simply are inescapable. Things like holiday music being played twenty-four hours a day, bright lights everywhere, movies like Elf and A Christmas Story on an endless loop. And cookies . . . lots of them.
Things can become overwhelming during this busy season. Regardless of how you feel about the holiday season, everyone likes being recognized for doing something well. This time of year, we sometimes get questions about possible compliance issues if a credit union wants to provide cash, gift cards or other small items to employees. What are the federal tax consequences that arise from such gifts? In particular, are those gifts considered income to the employee?
The Internal Revenue Code includes several items in gross income. Compensation for services, interest, rents and several other things are included in gross income. See, . One category of benefits specifically excluded from gross income are certain fringe benefits, which include
“(a) Exclusion from gross income
Gross income shall not include any fringe benefit which qualifies as a—
(1) no-additional-cost service,
(2) qualified employee discount,
(3) working condition fringe,
(4) de minimis fringe,
(5) qualified transportation fringe,
(6) qualified moving expense reimbursement,
(7) qualified retirement planning services, or
(8) qualified military base realignment and closure fringe.” See, 26 U.S.C. § 132(a)(1)-(8) (emphasis added).
A de minimis fringe is defined as “any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer's employees) so small as to make accounting for it unreasonable or administratively impracticable.” See, 26 U.S.C. § 132(e)(1). That’s helpful, isn’t it?
Unfortunately, these sections do not offer specific guidance. Thankfully, the IRS has some other information that may help clarify things. has an entire section on de minimis benefits. Publication 15-B includes examples of de minimis benefits that can be excluded from an employee’s income:
- Personal use of an employer-provided cell phone provided primarily for noncompensatory business purposes. See Employer-Provided Cell Phones , later in this section, for details.
- Occasional personal use of a company copying machine if you sufficiently control its use so that at least 85% of its use is for business purposes.
- Holiday or birthday gifts, other than cash, with a low fair market value. Also, flowers or fruit or similar items provided to employees under special circumstances (for example, on account of illness, a family crisis, or outstanding performance).
- Group-term life insurance payable on the death of an employee's spouse or dependent if the face amount isn't more than $2,000.
- Certain meals. See , later in this section, for details.
- Occasional parties or picnics for employees and their guests.
- Occasional tickets for theater or sporting events.
- Certain transportation fare. See , later in this section, for details.
Publication 15-B also provides examples of items that are not excludable as de minimis fringe benefits:
Some examples of benefits that are not excludable as de minimis fringe benefits are season tickets to sporting or theatrical events; the commuting use of an employer-provided automobile or other vehicle more than one day a month; membership in a private country club or athletic facility, regardless of the frequency with which the employee uses the facility; and use of employer-owned or leased facilities (such as an apartment, hunting lodge, boat, etc.) for a weekend. If a benefit provided to an employee doesn't qualify as de minimis (for example, the frequency exceeds a limit described earlier), then generally the entire benefit must be included in income.
More importantly, Publication 15-B expressly states that “[c]ash and cash equivalent fringe benefits (for example, gift certificates, gift cards, and the use of a charge card, or credit card), no matter how little, are never excludable as a de minimis benefit.” So if your credit union is considering giving cash or cash equivalents to employees as a holiday gift during this festive season, the Internal Revenue Code seems to require accounting for it in an employees’ income.
Tax law is highly specialized. If a credit union has questions about whether a certain type of noncash gift constitutes a de minimis fringe benefit that can be excluded from employees’ gross income or questions about the treatment of such gifts under state tax law, the credit union may wish to consult with outside counsel or an accountant for a thorough analysis tailored to the credit union’s circumstances.