Want to give your employees something to smile about? A section of the IRS code allows for something called de minimis fringe benefits.
De minimis benefits do not count towards an employee’s taxable income. They consist of occasional small gestures, such as buying the office lunch, bringing a birthday cake in for an employee’s birthday, or the occasional dozen doughnuts. The key is that the value of such benefits is small—so small in fact, that determining the fair market value of the benefit is more trouble than it’s worth, to you or the IRS.
The de minimis rule exists for “administrative convenience,” but should not be abused. IRS regulations make it clear that season tickets to the local ball team or providing a company vehicle more than one day a month exceed the de minimis limit. The IRS would consider this type of benefit includible in the employee’s taxable income.
The IRS lists the following items as acceptable de minimis benefits:
- Controlled, occasional employee use of photocopier
- Occasional snacks, coffee, doughnuts, etc.
- Occasional tickets for entertainment events
- Holiday gifts
- Occasional meal money or transportation expense for working overtime
- Group-term life insurance for employee spouse or dependent with face value not more than $2,000
- Flowers, fruit, books, etc., provided under special circumstances
- Personal use of an employer-provided cell phone provided primarily for noncompensatory business purposes.
The IRS specifically excludes cash and cash equivalent items (such as gift certificates) from the de minimis rule. These items must be included in the employee’s taxable income. An exception applies for occasional meal money or transportation fare to allow an employee to work beyond normal hours.
In determining whether a benefit is de minimis, you should always consider its frequency and its value. An essential element of a de minimis benefit is that it is occasional or unusual in frequency. It also must not be a form of disguised compensation.
Psychologically, the occasional perk can be more effective than an everyday benefit. Employees are surprised, feel that the perk is special and appreciate it more.