‘Tis the season of employee rewards and bonuses. Below is a quick guide for the tax consequences of gift giving:
Year-end bonuses are subject to the same payroll taxes that an employee’s normal pay is subject to. This includes all federal and state withholding requirements and the employee’s share of FICA taxes (which includes social security and Medicare).
Bonuses are considered to be “supplemental wages” by the IRS and are subject to special withholding rules. See IRS Publication 15 for more information. There are currently 2 methods you can use to withhold on your employee’s bonuses.
Percentage Method: Under this method the employer will issue a separate bonus payment and withhold at a federal flat rate of 25%
Aggregate Method: Under this method the employer pays the bonus with the employee’s most recent paycheck. In essence, the two are combined and then the amount is annualized and compared to IRS withholding tables to determine the appropriate amount of withholding
Large bonuses that exceed $1,000,000.00 are subject to separate flat rate rules.
De Minimis Fringe Benefits
The IRS defines de minimis fringe benefits as one which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical (Code Sec. 132(e)(1); Reg. § 1.132-6(a)). Thus, certain de minimis fringe benefits are not taxable to the recipient (such as an employee). Typically this includes such items as:
Controlled, occasional employee use of photocopier
Occasional snacks, coffee, doughnuts, etc.
Occasional tickets for entertainment events
Traditional Birthday or Holiday gifts (not cash) with low fair market values
An occasional cocktail party, group meal, holiday party, or picnic for employees and their guests
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 a cell phone provided by an employer primarily for business purposes
Please note that cash cannot be a de minimis fringe benefit unless it falls into one of the exceptions above. This includes gift cards, debit cards or other items that can be converted to cash.
One exception is gift cards that can only be redeemed for a specific, tangible item (for example a turkey or ham or movie passes) may qualify as a de minimus fringe benefit.
There is no bright line rule for de minimus fringe benefits. It is best to review you holiday gifts with your tax preparer and determine whether the benefit is nontaxable to the individual receiving the gift.
For more information on Fringe benefits, please refer to IRS publication 15-B https://www.irs.gov/pub/irs-pdf/p15b.pdf