The winter holidays have just ended, and many businesses did not follow the IRS rules on bonuses and gifts. Make a goal to get it right this year!
Why should you care?
Employees get home mortgages, car loans, and many other things based on their W2 income. While it may seem like you are doing employees a favor by trying to circumvent paying taxes on bonuses and gifts, in the long run you are not.
Imagine an employee not getting the house of their dreams because they didn’t make enough money per their W2 as it was missing all the employee’s bonuses. Yikes!
Number One – Gift Cards & Cash
Gift Cards are considered cash by the IRS and must be taxed.
“Cash or cash equivalent items provided by the employer are never excludable from income.”
Gifts are also taxable “if a benefit is too large to be considered de minimis, the entire value of the benefit is taxable to the employee, not just the excess over a designated de minimis amount. The IRS has ruled previously in a particular case that items with a value exceeding $100 could not be considered de minimis, even under unusual circumstances.”
Number Two – Exceptions
There are special circumstances in which gifts and small gift cards can be excluded from wages. Ask your CPA what dollar value for gift cards they consider de minimis.
Why ask your CPA? Because they are the one that will need to deal with the Federal, State, and Local agencies that may audit your books. The CPA I worked with when researching this topic said, $20 is the limit he would use. For example, a few $5 coffee cards during the year would be excluded as de minimis.
The Federal Department of Labor (DOL) states “Cash is generally intended as a wage, and usually provides no administrative burden to account for cash therefore cannot be a de minimis fringe benefit.”
What else does the IRS consider de minimis?
- Controlled, occasional employee use of photocopier
- Occasional snacks, coffee, doughnuts, etc.
- Occasional tickets for entertainment events
- (Small) holiday gifts
- 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
“An essential element of a de minimis benefit is that it is occasional or unusual in frequency. It also must not be a form of disguised compensation.”
Number Three – Discretionary or non-Discretionary
If your employees can reasonably expect a quarterly or holiday bonus it is not discretionary.
Why should you care?
Per the Federal Department of Labor all overtime pay must be recalculated to include non-discretionary bonuses as part of regular pay.
Bonuses under the Fair Labor Standards Act (FLSA)
Here’s the math:
A non-exempt employee is paid $10.00 per hour and receives a $50.00 bonus in a particular week that was promised for helping to produce a special order for a customer two weeks earlier than previously scheduled. The employee worked 43 hours that week. The following is an example of how to compute overtime pay based on the employee’s regular rate:
$10.00 per hour x 43hours = $430.00 (total compensation for straight time)
$430.00 + $50.00 (bonus) = $480.00 (total compensation)
$480.00 ÷ 43 hours = $11.16 (regular rate)
$11.16 x .5 = $5.58 (half time premium pay rate)
$5.58 x 3 overtime hours = $16.74 (overtime pay due)
$480.00 + $16.74 = $496.74. (total due)
Number Four – Accountable Plans
You can set up an accountable plan, meaning a plan in writing and followed as written, to award “tangible personal property” (no gift cards or cash) as part of a meaningful presentation for things like length of service, safety and recognition of exemplary service.
At my last day job, we employed over 20 people, and we created an accountable plan to celebrate one employee’s exemplary service at each month’s staff meeting. The management team would vote to decide who received the award, and we made sure that one employee did not receive more than two awards per year.
Why are you giving out holiday bonuses?
It’s not mandatory to give bonuses in the winter. Employees often come to expect the holiday bonus, making it both nondiscretionary and disincentivizing.
I have heard more complaints about the size of holiday bonuses than gratitude. When the bonus is expected, and employees do not show gratitude, owners become disgruntled and feel forced to hand out money. In some cases, this is more than the company can afford.
Tying bonuses to a religious holiday is bit problematic. As stated in the Wharton University of Pennsylvania article titled Separation of Church and Cubicle: Religion in the Workplace “Religion divides people.” Handing out bonuses and calling them Christmas bonuses makes the assumption that all your employees celebrate that religious holiday. Many very divisive topics, such as rights for women and the LGBTQ community, are tangled up with religious beliefs, meaning your “Christmas” bonus could be creating a potential hostile work environment for some employees.
“Making religion and the workplace comfortable bedfellows comes down to making a distinction between religion and spirituality for Wharton’s Friedman. Religion divides people. Spirituality, on the other hand, embraces many of the same virtuous qualities any employer wants to see take hold: “The notion of having a spiritual consciousness, being rooted in values such as loving kindness and the connection of all humans as one family, treating others as you wish to be treated, karma, taking care of the planet we share — these are all very useful values for any organizational setting,” he points out.”
- If you give out gift cards and cash, it needs to be treated as taxable income to the employee.
- Tangible property i.e., gifts of goods are also taxable in many cases.
- Understand the definition of de minimis and document it in your accounting procedure manual.
- Either provide surprise taxable bonuses at different times of the year or expect to recalculate the overtime for all non-exempt employees for non-discretionary bonuses.
- If you set up quarterly “profit sharing” plan that is actually a bonus plan you will need to recalculate overtime each quarter per the DOL.
Think about why you are giving bonuses. Are the bonuses increasing employee moral and improving corporate culture or diminishing both?
Unfortunately, for most companies “Christmas” bonuses have a net zero return on investment, meaning they do not improve or impair employee moral or company culture.
The Grinch that Stole Christmas Bonuses