When it comes to showing your employees your appreciation for everything they do, de minimis fringe benefits are a great way to express your gratitude for your team of dedicated employees.
This non-wage compensation method has been utilized by a number of differently-sized corporations for decades.
Are you noticing that your team members are losing momentum in the wake of protocol modifications or compounding work responsibilities? This article will take a closer look at what de minimis fringe benefits entail and how they can positively impact your business and employees.
De minimis fringe benefits
By definition, these are types of employee benefits that are distributed infrequently and in such small quantities that they don’t need to be reported by a business’s accounting department. When tax season arrives, these types of benefits are not taxed, as they are viewed by the Internal Revenue Service as not having a large face value. While there is no legal dollar amount this type of benefit must fall under, the IRS has ruled in the past that values over $100 shouldn’t qualify for de minimis status.
One of the best ways to educate yourself on this type of benefit is to consider various examples. There are many examples of de minimis fringe benefits that your business may stumble upon throughout the year. However, these are some of the most common examples of de minimis fringe benefits:
- Holiday Gifts
- Occasional Snacks
- Tickets to entertainment events
- Transport and food money for overtime working
- Gift baskets/books
- Birthday gift
- Personal use of employer equipment
- Educational assistance
- Cocktail parties
- Local phone calls
How are they reported on taxes?
When an employee is paid, they must report their personal income on their tax return. This also includes the reporting of benefits they receive such as cash bonuses. However, in the case of de minimis fringe benefits, the circumstances are a little different. When an employee is awarded a benefit that is sorted into the de minimis category, reporting isn’t necessary on tax forms. This includes both business and employee tax forms. These benefits are considered tax-free benefits.
For this reason, many businesses research the various types of benefits they can offer that fall into this category. The two main qualifying characteristics for a de minimis fringe benefit are the following: one, it must be a form of compensation that doesn’t occur often. Two, the benefit can’t have a high face value. Any benefit that doesn’t fit into these categories would be considered disguised compensation from the employer to an employee, if not correctly reported on tax forms.
One of the main reasons why these benefits are considered highly useful for businesses and business owners, alike, is because they provide win-win scenarios in tax scenarios. De minimis fringe benefits are considered nontaxable, so an employer isn’t required to put forth tax money, much like an employee isn’t required to claim the de minimis fringe benefit. Also, these costs can be tax-deductible for the business. Therefore, a business is able to deduct a de minimis fringe benefit freely and is exempt from paying taxes on the money spent.
The benefits of offering de minimis fringe benefits
Now, you should have a pretty clear idea of what de minimis fringe benefits are and how they’re implemented in a business setting. As an entrepreneur, it pays to think about incorporating this type of benefit into your company’s rewards program. Let’s take a look at the top benefits you can capitalize on by employing the use of de minimis fringe benefits.
As you likely discovered through the information above, this type of benefit is tax-free for both the business and the employee. Because of the perceived small face value of the benefit and its infrequent occurrence, there’s no need to report it as compensation on tax returns. This can help to minimize accounting costs for your business while keeping your employees happy.
It allows small businesses to compete for employees
Traditionally, large businesses have held the upper hand when it came to recruiting employees, as bigger businesses can afford to pay more in benefits and bonuses than small businesses can. However, de minimis fringe benefits have changed the playing field.
Now, small businesses can easily compete for star employees by offering small benefits every now and then. Instead of receiving a large cash bonus at the end of the year, small businesses can offer free tickets to an employee’s favorite show or another unique benefit that shows your commitment to your employees’ individual interests.
Another awesome benefit of de minimis fringe benefits is that they’re tax-deductible. This means that businesses can report the money spent on these benefits as an expense. This practice, in general, helps businesses reduce their end-of-year tax bill.
The importance of frequency
Due to the gray area involved in the definition of de minimis fringe benefits, many businesses may shy away from utilizing them. The confusion can get you into some serious tax troubles with the Internal Revenue Service. However, you shouldn’t let the unknown stop you from utilizing this benefit. This holds especially true if you’re a small business owner.
Any minimis-fringe beginner will want to understand the importance of frequency and how said frequency plays a role in the benefits’ tax-free, tax-deductible nature. When they aren’t gifted on a regular basis, this helps to solidify these benefits as de minimis. If you’re considering giving out benefits like this on a regular basis, then you risk toeing the line of whether or not these benefits actually classify as de minimis fringe benefits.
A good rule of thumb is to give them out randomly. For example, if one of your employees is a big fan of a particular sports team that is coming into town, consider purchasing them tickets. This customized gift will mean a lot to the employee and increase your employee retention rate. Since the team only comes into town once or twice a year, this wouldn’t border the line of being disguised compensation. It would be categorized as de minimis fringe benefits, without a second thought.
Who to ask for professional help
If you’re still not comfortable in your ability to assess whether or not specific gifts are considered de minimis or not, then you should seek professional assistance. Your accounting firm should be able to clearly answer your questions and resolve any doubts regarding a gift’s ability to be classified as a de minimis fringe benefit.
If you don’t have an accounting firm that you usually work with, you can always contact the Internal Revenue Service directly for a quick answer. In the context of taxes, it’s always a good idea to verify whether or not a benefit classifies as de minimis or not before you decide to purchase it.