Federal Rules from SSA/IRS Reporter, Fall 2008
Situation: The Yellow Willow Company traditionally rewarded its employees with gifts for the year-end holidays (typically a turkey and a monetary award). These gifts were not based on employee performance or company profits but were instead due to Willow’s genuine interest in promoting goodwill with the workers.
Question: How will Yellow Willow’s gifts affect its employment tax responsibilities?
Answer: In general, any amount an employer transfers to employees,(directly or indirectly)-is taxable for social security, Medicare, income tax withholding, and federal unemployment taxes. Exceptions to this rule include de minimis (i.e. minimal) fringe benefits. A de minimis fringe benefit is any property or service (other than cash or cash-equivalents), the value of which (after taking into account the frequency with which similar fringes are provided), is so small as to make accounting for it unreasonable or administratively impracticable. De Minimis Fringe Benefits: Traditional holiday gifts (such as a turkey) with nominal value are excludable from wages as “de minimis” fringe benefits. As such, no federal employment taxes or wage reporting is due from Willow for this item.
Other de minimis fringe benefits include: the occasional typing of personal letters; coffee and soft drinks; and occasional meal money or local transportation fare paid to enable an employee’s overtime work. Further examples and information on de minimis fringes and other fringe benefit wage exclusions (such as transit passes and certain achievement awards for safety/ length of service) are provided in section 2 of Publication 15-B, Employer’s Tax Guide to Fringe Benefits www.irs.gov/publirs-pdf/p15b.pdf).
Cash or Cash-Equivalents Not Excluded: Cash (whether currency, check, direct deposit, etc.) and cash-equivalents (e.g. gift cards) are taxable compensation. Willow, accordingly, must report the monetary gifts it made as (supplemental) wages, egardless of the amount, and pay the employment taxes owing. Both the employee and the matching employer shares of social security and Medicare taxes are owed by Willow, even if it remits them without deducting the employee portion from the award. (Section 7 of Publication 15-A, Employer’s Supplemental Tax Guide, www.irs.gov/pub/irs-pdf/p15a.pdf, provides examples on how to figure the tax liability and the corresponding wage amounts in this situation). Similar computations can apply if an employer remits income tax withholding without deducting it from wages.
The State of Alaska does not provide for de minimis payments to employees in its statute.
AS 23.20.530. Wages Defined. a) In this chapter, “wages” means all remuneration for service from whatever source, including, but not limited to, insured work, noninsured work, or self-employment; commissions, bonuses, back pay, and the cash value of all remuneration in a medium other than cash shall be treated as wages; gratuities customarily received by an individual in the course of service from persons other than the individual’s employing unit may be treated as wages received from the employing unit only to the extent the individual reports the gratuities to the employing unit. The reasonable cash value of remuneration in a medium other than cash, and the reasonable amount of gratuities, shall be estimated and determined in accordance with regulations adopted by the department; notwithstanding AS 23.20.350 (a), back pay awards shall be allocated to the weeks or quarters with respect to which the pay was earned. If the remuneration of an individual is not based upon a fixed period of time or if the individual’s wages are paid in irregular intervals or in a manner that does not extend regularly over the period of employment, the wages shall be allocated to weeks or quarters in accordance with regulations adopted by the department. The regulations must, so far as possible, produce results reasonably similar to those that would prevail if the individual’s wages were paid at regular intervals. When an employer has filed for bankruptcy, unpaid wages earned for services performed for the employer are considered wages for the quarter in which they were earned.
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