There are times when an employer feels the need to reward an employee outside of a regular bonus, or to reward for an outstanding job done on a particular project. Compelled by good intention, the employer rewards the employee by giving a small gift such as a gift card, tickets to the entertainment or sport events, treatment at the spa, etc. without realizing that the generous gesture may be qualified as a fringe benefit and will need to be recognized as income according to the IRS rules and regulations.

According to the IRS Employer’s Tax Guide to Fringe Benefits, Publication 15-B for 2009, “Cash and cash equivalent fringe benefits (for example, use of gift card, charge card, or credit card), no matter how little, are never excludable as a de minimis benefit, except for occasional meal money or transportation fare.)  For this matter, the employer must report gifts that are not qualified as a de minimis benefit as compensation to his/her employee. This means that it has to be run through payroll, will be subject to social security and medicare taxes as well as federal and state tax withholdings.  Both the employer and employee need to be aware about these tax consequences, which will add to the employer’s cost and reduce the benefit to the employee. 

We are constantly asked if the IRS has a dollar threshold for gifts.  The $25 gift threshold in the IRS website does not necessarily apply to employees.  So what is the threshold?  We have yet to see one stated by the IRS.  It boils down to a fact and circumstance issue and in the end it is best to report as income to the employee than have this become a matter of interest to the IRS.

For more information on examples of de minimis benefits please visit the IRS website link http://www.irs.gov/pub/irs-pdf/p15b.pdf.

Natalia Siegel, Senior Accountant