It’s the holiday season. Depending on your business, you might be in the midst of holiday sales and special offers. You might have decked your office or retail space with festive decorations to show holiday spirit to customers.
But, what about your employees? You want to show them some holiday cheer, too.
Perhaps you organize a holiday party for employees and their spouses. Maybe you give something to all your workers, like a bonus or a gift.
Both of these options are good ideas and can lift workplace morale. But, you should be aware of the basic payroll tax implications before you spread your goodwill.
Maybe you are planning a holiday party for your employees. Will it be a company-provided lunch, an after-work get-together, or an upscale cocktail soiree with spouses?
Whichever shindig you choose, odds are your party is a de minimis fringe benefit.
De minimis fringe benefits are things you infrequently give your employees. These benefits also have a small value. Because the value and frequency of these benefits are so little, you do not have to account for them in employee income. Also, no one has to pay payroll taxes on de minimis fringe benefits.
Section 1.132-6(e)(1) of the tax code considers “occasional cocktail parties, group meals, or picnics for employees and their guests” to be de minimis benefits. This means you do not have to include your holiday party in employee wage reports, and no one has to pay taxes on the party’s value. But, if you throw frequent employee functions, your company gatherings might not be de minimis benefits.
Basic payroll: bonuses
Your business is doing well, so you want to reward your hard-working employees by sharing some profits. A holiday bonus check is typically a lump sum that you add to an employee’s wages.
Bonuses are taxable wages. One of the payroll basics you need to remember is to withhold payroll taxes from employee wages. These include income taxes and FICA taxes. You also have to pay unemployment taxes and the employer part of FICA taxes.
You can also bestow holiday merriment to employees by giving them tangible gifts. The IRS considers all gifts reportable and taxable compensation unless there is an exception. Luckily, holiday gifts are often an exception.
To be considered de minimis, holiday gifts must have a low value. While there is no clear line dividing high- and low-value gifts, the IRS ruled that gifts valued at $100 per employee are not de minimis benefits.
Cash and cash equivalent gifts (e.g., gift cards) are not considered de minimis benefits. The IRS considers cash to be wages, and thus reportable and taxable. Are gift cards taxable income? If you give gift cards to your employees, the value is taxable, no matter how small the amount.
A gift must be a tangible item for the IRS to consider it a de minimis benefit. Gifts that are de minimis benefits include:
- personalized office supplies,
- food items,
- sports or theater event tickets,
- mugs, and
Gifts that are not de minimis benefits include:
- season sports or theater tickets,
- memberships to a private country club or athletic facility,
- the use of employer-owned or leased facilities, and
- the use of an employer-provided vehicle for more than one day a month.
Let’s say you want to give holiday hams to your employees.
You buy the hams and distribute them to your employees. The hams are de minimis benefits because they have a small value, are infrequent, and are not considered cash wages.
Or, you could give vouchers to employees for free hams at a local grocery store. The IRS might consider the vouchers to be de minimis benefits because employees can redeem them only for hams. The vouchers have no cash value. It is up to IRS discretion to determine if the vouchers are de minimis benefits. If you are unsure about whether a gift is a de minimis benefit, it is always safer to list the value of the gift as employee compensation.
If you give your employees gift cards to a local grocery store, the gift cards are not de minimis benefits. You must report the value of each card and remit payroll taxes.
What if your business happens to sell holiday hams? You give your employees certificates redeemable for a ham at your own store. The certificates are often de minimis benefits because employees redeem them for your business’s merchandise.
For more information about de minimis benefits, look at IRS Publication 5137.
For holiday gifts that are not de minimis benefits, you can give employees another gift: a tax gross-up.
When a gift is taxable, you can provide employees with extra wages to cover the tax. Doing this is called a tax gross-up. Giving extra wages ensures your employees can enjoy your gifts without seeing anything subtracted from their normal wages.
A gift to you, from the IRS
Are you skipping the gift giving this year because it is money out of your business’s pocket? Don’t let the cost stop your merrymaking. You might be able to deduct holiday gifts and bonuses as business expenses.
The IRS allows you to deduct up to $25 for gifts given to individual employees each year. That is something to be joyous about this generous season, especially if you give smaller gifts.
While this is a busy time for many businesses, enjoy this jolly occasion as you wrap up your business this year.
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