The annual Christmas season is fading into memory now that employees are making their way back to work. In the payroll department, staff is already working hard to handle the tax reporting crunch that will now consume their days for the next several months. Is your payroll department ready? Better yet, does your staff know what to do about those Christmas bonuses your company distributed?
Generous employers like to show their appreciation by distributing Christmas gifts and bonuses to their workers. Some employers offer fruit baskets, free holiday parties, chocolates, and so forth. Others issue cash bonuses as either checks, direct deposits, or gift cards. It is up to the payroll department to figure out what to do with those bonuses in terms of reporting. The key to getting it right is the Latin phrase ‘de minimis’.
For tax purposes, a de minimis benefit would be a benefit of very low value and one that is given infrequently. Let’s say an employer rewards its employees by buying them lunch on their individual birthdays. Because that birthday lunch is not expensive and given only once per year, it would be considered a de minimis benefit. Such benefits do not have to be reported because they are not taxed.
De Minimis Holiday Benefits
The question this time of year is whether holiday bonuses and gifts should be reported. The place to start is looking at value. How much does the employer spend on bonuses and gifts, on a per employee basis? What is the value as compared to an individual’s overall pay and benefits?
Unfortunately, there is no dollar amount that can be applied here. The IRS tends to rely more on the form of the benefit rather than its value. For example, a Christmas poinsettia is of low value as compared to an employee’s annual salary. But more importantly, the poinsettia does not have any real cash value inasmuch as the employee could not turn around and sell it for the same amount the employer paid for it. This is what makes the poinsettia a de minimis benefit.
Giving your employees lunch on the last day of work is similar. That lunch has no cash value to the employee, thus it is considered de minimis. Gift cards and cash bonuses are completely different. They obviously have cash value, which is important to the IRS.
Gift Cards and Bonus Pay
Any and all bonus pay is obviously taxable. It must be reported along with tips and wages; employers must withhold a certain percentage to pay as federal and state taxes. Gift cards may or may not be treated the same way. The cash value of the card is what matters, according to payroll and benefits provider BenefitMall.
If an employer gives a gift card that can be redeemed for anything the issuer offers, it is considered to have a cash value. So a $25 gift card for Amazon would be considered taxable income. On the other hand, a gift card with a specific redemption attached might not be.
Let’s say that same employer gave a gift card that could only be redeemed for a Christmas ham. The card simply acts as an electronic coupon, with no cash value should an employee decides not to avail him or herself of the ham. Such a gift card would likely be considered de minimis by the IRS.
BenefitMall recommends that any employers that have trouble with these sorts of things contact a third-party payroll provider. Contracting payroll to a company like BenefitMall eliminates all the hassles of payroll withholding and annual reporting.