By: Matts Batryn
Like most business owners, you appreciate your hard-working employees.
Without them, you wouldn’t be the business savant you are today. You want to show a little extra bit of appreciation toward your employees where you can, as showing people respect and gratitude pays dividends in the long run. Unfortunately, what you may see as a typical cost of doing business may have severe tax consequences for your employees. Let’s walk through three typical scenarios many businesses see on a day-to-day basis:
You buy several $100 Amazon gift cards for your team of employees to show them love. Innocent enough, right? Wrong. The police roll up and your employees are now all going to jail for failing to declare taxable income. Try again.
Ok, instead of gift cards you decide to give your top performing sales team an award consisting of individualized gold rings. Whoops. Jail time for everyone. That’s taxable income.
Fine, no more gifts. You decide to create a 95% product discount for all your employees to keep them happy. Employee discounts are allowed, right? Well, yes…but no. Do not pass go. Go directly to jail.
While the above scenarios may embellish the severity of the offense, they highlight the fact that these innocuous, everyday gifts or transactions have real-world tax implications for business owners and their employees.
gifts are not gifts
The relationship between a business owner and employee is a sacred one – especially in the eyes of the Internal Revenue Service.
As a general rule for business owners, ALWAYS presume that anything you give to an employee is an exchange for services. Therefore it is taxable income to the employee. Even if you fully believe it to be an innocent gift at Christmas or as a summer treat, the IRS presumes it to be income subject to taxation. Yes, you could make sure your employee declares their $40 iTunes gift card on their tax return, but this isn’t the Price Is Right. Nobody wants to receive a gift they must pay for.
not all “gifts” are created equal
It is vital that business owners and entrepreneurs are aware of what they can and cannot bequeath to their employees free of repercussions. The IRS may see these employer-to-employee exchanges as non-gifts, but they also categorize many common exchanges as benefits of the job not subject to taxation.
To be regarded as a mere benefit of a job and not compensation for services, you need to see if your job benefits fall into one of these common categories:
De Minimis Benefits
These are the most common in a workplace and what most employees consider regular “perks of the job.” A de minimis benefit is something given that is so small it really makes no sense to account for it. Examples include employees utilizing office supplies for allowed personal use, a coffee maker or doughnuts in the break room, and fun trinkets or stationery given to employees. The general rule of thumb is to keep all tangible gifts to $75 or less per taxable year. This means no $100 Walmart gift cards or a new set of fancy headphones.
Many business owners confuse job “perks” to include prizes or rewards for a job well done. This often includes cash prizes for meeting goals, achievement awards, or performance bonuses like vacations or paid outings. These are ALL taxable income to the employee, as they are viewed as compensation for services rendered.
Meals of Convenience
Do free meals and snacks at work every day sound too good to be true? Well, it should. Because it usually is. The new employee cafeteria or daily luncheons may be a great idea to boost morale, but it is taxable to the employee in most cases.
The IRS looks to see if the employee meals are provided as a convenience to the business owner. Are the meals provided because the working conditions do not allow for other food choices nearby? (Think mine workers, oil fields, etc.). Would the employees need to spend extensive time changing outfits and moving between locations? The IRS wants to see that providing meals is a regarded custom of the job and a near requirement of the work being done. If it’s a sales team working 9-5 in a cushy downtown office, then the meals provided are likely to be seen as extraneous and therefore taxable.Discounts
Many business owners view discounts as their “get-out-of-jail-free” card when it comes to making their employees feel recognized and wanting to remain with the business. However, discounted products and discounted services for employees are heavily scrutinized by the IRS, which can result in more of a “get-in-jail” scenario for those who dodge tax liability.
Employee discounts are when employees get products or services for less than the sale price to regular customers. For services, the rule is that it may not exceed 20% off the regular price. For product discounts, the discounted price cannot exceed the gross profit percentage of the item being sold. For example, if you buy widgets for $70 and sell them for $100, you have a gross profit percentage of 30%. This means the discounts to your widget employees may not exceed 30%. If employees are getting more than the maximum discount, up to the maximum is tax-free. The extra discount is considered pure income to the employee and subject to Uncle Sam.
Only when services are at no additional cost to the business owner may they be completely tax-free to the employee. No additional cost services are only allowed when they are in the regular course of business and are first available to the general public. For example, a plane ticket is free to airline employees if the ticket is standby and doesn’t impede profit or take up resources of the business.
the main take-away for business owners
Business owners must evaluate many moving parts when providing employees with gifts, benefits, or services. The first question to ask is if everyone within the business can receive it. Job perks are seldom part of a hierarchy, so if your senior staff are the only ones who get free food and parking, then the IRS will likely see that as pure compensation. Of course, many other considerations include how often employees receive the perk, is it a required part of operating vs. extra, and how extravagant it is.
The only way to know what must be declared as taxable income (or what you as a business owner are entitled to deduct), is to consult with a reputable business tax attorney in your area. Although you may have many questions with many potential answers, the only accurate answer your business will ever receive without meeting an actual attorney is “it depends.”
This post has been reproduced and updated with the author’s permission. It was originally authored on February 9, 2022 and can be found here.
Sources:
https://www.law.cornell.edu/uscode/text/26/102
https://www.law.cornell.edu/uscode/text/26/61
https://answerconnect.cch.com/document/arp109ce9ded07c571000a8b390b11c18c90202f/federal/irc/explanation/what-is-a-qualified-employee-discount#:~:text=A%20qualified%20employee%20discount%2C%20the,on%20qualified%20property%20or%20services.&text=An%20employee%20discount%20is%20the,customers%20who%20are%20not%20employees.