Employers often show their gratitude to their employees for all the hard work during the year by giving holiday gifts (either cash or non-cash). In most circumstances, these gifts, bonuses or awards are considered taxable income that must be reported on the employee’s Form W-2 and is subject to payroll and income taxes. However, it is possible that certain non-cash gifts are excluded from tax treatment under the Internal Revenue Code.
As a general rule, “[g]ross income does not include the value of property acquired by gift, bequest, devise, or inheritance.” 26 U.S.C. §102(a). However, this provision “shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee.” 26 U.S.C. §102(c). The words “any amount” are intended to cover any transfer of money or property from an employer to an employee no matter if the transaction is classified either as compensation or as a personal gift from the boss to his or her subordinates. It is irrelevant what kind of creative label the employer’s attorneys or accountants place on the conveyance because it will be included in taxable income for the employee anyway. This means that the employer will have to report payroll taxes and the employee will have to report it on his or her individual tax return.
In Commissioner v Duberstein, 363 U.S. 278; 80 S.Ct. 1190; 4 L.Ed.2d 1218 (1960), the U.S. Supreme Court determined that several conveyances from an employer could not be considered “gifts” excluded from taxable income. In one instance, a taxpayer provided a business corporation, upon request, the names of potential customers. The business corporation then reciprocated by giving the taxpayer a Cadillac automobile as a “gift” and charged the cost as a business expense on its own corporate tax return. In another instance, a taxpayer resigned as comptroller of a church corporation and was given a “gratuity” of $20,000.00 “in appreciation of” his past services. The IRS assessed an income tax deficiency against both taxpayers for failing to include this amount in gross income. The U.S. Supreme Court agreed and determined these transactions could not be considered personal gifts and cannot be excluded from tax liability. Generally speaking, the U.S. Tax Court, the U.S. Court of Appeals and the U.S. Supreme Court tend to treat most conveyances from employers and employees as non-gift events and will back the Internal Revenue Service on these challenges.
However, there are two general categories of employer to employee transfers that are excluded from gross income: de minimus fringe benefits and employee achievement awards.
DE MINIMUS FRINGE BENEFITS
“The term ‘de minimis fringe’ means 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.” 26 U.S.C. §132(e)(1). The fair market value of the fringe and whether it is more than occasional are factors in considering whether it is excluded from the employee’s income. However, the provision of any cash fringe benefit is NEVER excluded from the employee’s income. 26 CFR § 1.132-6(c). Gift certificates redeemable for general merchandise or have a cash equivalent value are also never considered de minimis fringe benefits.
“Examples of de minimis fringe benefits are occasional typing of personal letters by a company secretary; occasional personal use of an employer’s copying machine, provided that the employer exercises sufficient control and imposes significant restrictions on the personal use of the machine so that at least 85 percent of the use of the machine is for business purposes; occasional cocktail parties, group meals, or picnics for employees and their guests; traditional birthday or holiday gifts of property (not cash) with a low fair market value; occasional theater or sporting event tickets; coffee, doughnuts, and soft drinks; local telephone calls; and flowers, fruit, books, or similar property provided to employees under special circumstances (e.g., on account of illness, outstanding performance, or family crisis).” 26 CFR § 1.132-6(e)(1). “Low fair market value” for holiday gifts generally means $25.00 or less. The IRS generally does not consider any benefit valued over $100.00 to be de minimus.
“Examples of fringe benefits that are NOT excluded from gross income as de minimis fringes 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; employer-provided group-term life insurance on the life of the spouse or child of an employee; and use of employer-owned or leased facilities (such as an apartment, hunting lodge, boat, etc.) for a weekend.” 26 CFR § 1.132-6(e)(2).
EMPLOYEE ACHIEVEMENT AWARDS
An employment achievement award means an item of tangible personal property which is transferred by an employer to an employee for length of service achievement or safety achievement, awarded as part of a meaningful presentation, and awarded under conditions and circumstances that do not create a significant likelihood of the payment of disguised compensation. 26 U.S.C. §274(j)(3)(A)(i). “Tangible personal property” does not include “cash, cash equivalents, gift cards, gift coupons, or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items pre-selected or pre-approved by the employer), or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items.” 26 U.S.C. §274(j)(3)(A)(ii).
“Gross income shall not include the value of an employee achievement award received by the taxpayer if the cost to the employer of the employee achievement award does not exceed the amount allowable as a deduction to the employer for the cost of the employee achievement award.” 26 U.S.C. §74(c)(1). “If the cost to the employer of the employee achievement award received by the taxpayer exceeds the amount allowable as a deduction to the employer, then gross income includes the greater of an amount equal to the portion of the cost to the employer of the award that is not allowable as a deduction to the employer (but not in excess of the value of the award), or the amount by which the value of the award exceeds the amount allowable as a deduction to the employer.” 26 U.S.C. §74(c)(2). “The remaining portion of the value of such award shall not be included in the gross income of the recipient.” Id.
THE BOTTOM LINE
Employers who provide holiday gifts to their employees must take this remuneration into account when preparing year-end payroll reports and W-2 forms. If you have further questions about federal taxation, then do not hesitate to contact the experienced tax professional at Kershaw, Vititoe & Jedinak PLC for assistance today.