by Anna Baumgardner, CPA | 08/24/2022
Want to reward your employees for a job well done, or provide a celebratory gift? Sounds great, but be careful! Anything above de minimus is taxable – and how you process cash gifts through payroll makes a big difference. In this discussion, I’ll walk you through the implications and concepts of paying out cash, de minimus, and other benefits you can provide to reward and encourage employees.
All Income is Taxable
There are very few exceptions that would exclude any cash or gift from employer to employee from taxability. If you’re processing payroll on your own through a payroll service provider, be sure to understand the lingo used for each pay category.
Amounts listed in payroll as “bonus” are separated from regular wages in payroll software, and are considered ”supplemental income” by the IRS. Using this field typically results in a higher amount withheld from the bonus pay, though ultimately the year-end tax consequence is the same for bonus amounts as for regularly-scheduled wages. The “Miscellaneous” field is typically a taxed income as well. “Reimbursement” amounts are not taxed, but the employer is responsible for supporting this as a bona fide expense when it is included in their taxable-income-reducing expenses on the annual return. Even gift cards are taxable to the employee, where the employee is responsible for reporting those amounts as income on their annual return.
The IRS does have a provision in place for de minimus benefits, which “considering its value and frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical.” The list of common de minimus benefits provided by the IRS includes things that tend to happen incidentally, and are not often particularly planned (occasional use of photocopier, office snacks, flowers provided under special circumstances, personal use of business cell phone).
There are two key comments (summarized below) from the IRS which are important to consider:
- Cash provides no administrative burden to account for, and is generally intended as a wage, therefore it cannot be considered a de minimus fringe benefit (not taxable to employee) EXCEPT for occasional meal or transportation money to enable an employee to work overtime or an unusual schedule.
- Gift certificates are treated like cash, and are never excludable from income EXCEPT under the occasional meal or transportation for overtime or unusual schedule provision noted in #1, OR EXCEPT where that certificate allows an employee to receive a specific personal property item of minimal value, provided infrequently – depending on facts and circumstances.
What about milestones? It’s common to reward an employee for years of service or particularly notable achievements, and if the award is not cash, a vacation, meals, lodging, entertainment, or securities, and is awarded in a meaningful presentation (presumably an event), awards of tangible personal property may be given tax-free.
Alternatives to Cash
So what can an employer provide, instead? Indeed.com offers a longer list of benefits to consider, but to get the most bang for your (tax) buck, consider long-lasting alternatives like
- flexible scheduling,
- gym memberships (may qualify as tax-free!),
- cell phone reimbursements
- in-office treats (may fall under de minimus category!),
- or home-office improvement reimbursements
Keep in mind that some of the benefits in this list are taxable, so consult with your favorite accountant or HR professional before committing. Schedule a call at your convenience with an RY CPAs advisor!