Do you want to recognize an employee’s 20 years of service by giving a gift? Perhaps you want to refund local transportation costs or open a cafeteria so your employees can eat on-site. Maybe you just want to know how to handle those annual holiday turkeys you give to employees. All of these situations are governed by the Internal Revenue Service’s (IRS) rules on de minimis fringe benefits.
“De minimis” is one of those Latin phrases that lawyers love to throw around without ever explaining what it means. In a nutshell, it means “too small to worry about” (yes, even the law recognizes that some things—granted, very few—just aren’t worth quibbling over).
De minimis fringes are excluded from an employee’s income and wages because their value is so small that it makes accounting for them unreasonable. But the question of what is and is not a de minimis fringe is not always clear-cut, and the IRS is wary of providing a list of exactly what does and does not qualify. Today we’ll look at the rules in some detail, with thanks to contributing attorney editor Vicki Nielsen of Ogletree Deakins.
De Minimis = Too Small to Matter
Under the Internal Revenue Code, de minimis fringe benefits are excluded from an employee’s (or other service provider’s) income and wages. Consequently, the value of the item is not subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) taxes, or Federal Unemployment Tax Act (FUTA) taxes.
The statute defines a de minimis fringe benefit as:[A]ny property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees) so small as to make accounting for it unreasonable or administratively impracticable.
In short, as mentioned above, the benefit is too small to worry about. The frequency with which similar de minimis fringe benefits are provided to employees is considered a “relevant factor” in determining whether the de minimis test is met.
How Often Is Too Often?
In general, the frequency with which de minimis fringes are provided must be measured by reference to the frequency with which the benefits are provided to specific individuals, not the frequency with which the employer provides them to its workforce as a whole.
For example, if a particular employee receives a “holiday gift” every month or meals on a regular basis, no de minimis exclusion would apply even though the practice is infrequent with respect to the entire employee group.
Similarly, even though the use of an employer-provided vehicle for no more than 1 day a month is listed as an example of an excludible de minimis fringe, that does not mean this benefit would be excludible if it were provided monthly.
However, if measuring each employee’s de minimis benefits is administratively impracticable, frequency may be measured by reference to the employer’s general practices in providing these fringe benefits to all of its employees. Under this rule, the de minimis exclusion may apply even though a particular employee receives the benefit often.
For example, as long as an employer can show that 85% of the use of an office copier machine is for business purposes, any personal use of the machine is treated as a de minimis fringe even if some employees are frequent fliers when it comes to copying personal documents.
This “frequency across the workforce” test is not available, however, in determining the excludability of meal money or local transportation fare provided on an occasional basis to enable employees to work overtime. To treat meals and entertainment expenses as fringe benefits, an employer may use statistical sampling to offer an estimated, rather than actual, value per employee.
How Small Is Small?
After accounting for how frequently the item is offered (either on an individual employee basis or a workforce basis), the question becomes, what is the meaning of “small”? Until recently, the IRS—in typically infuriating fashion—repeatedly refused to answer that question, always indicating that it was a matter of facts and circumstances. However, in informal memoranda, the IRS has addressed whether particular amounts are de minimis.
The regulations do provide some helpful examples of de minimis fringe benefits that have guided employers and arguably permitted them to move the de minimis line upward as the typical fair market value of the listed items increased.
For example, the regulations provide that occasional theater or sporting event tickets are examples of de minimis fringe benefits. Also, except in the case of company cafeterias, this exclusion applies even if the benefits are provided on a discriminatory basis.
Thus, for example, if an employer provides occasional holiday gifts, retirement parties, or occasional tickets to sporting events only to high-paid employees, the value of these benefits can still be excludible from the employees’ gross income as de minimis fringe benefits.
Who Counts as an ‘Employee’?
The term “employee” for purposes of the de minimis exclusion is defined to include any recipient of a fringe benefit. Technically, this exclusion is not even limited to individuals who currently or previously performed services for the employer. Instead, it could be extended to people who never were employees but who receive small benefits, such as advertisements, promotions, or personal favors, that satisfy the conditions of the exclusion.
The statute supports this application of the de minimis exclusion because it technically applies to any small-value, infrequently provided property or services, not just to ones that may be “provided to employees.” In most examples, however, this exclusion is applied to benefits employers provide their employees.
What About Cold Hard Cash?
According to IRS regulations, cash can never be treated as a de minimis fringe benefit, except in the limited cases of overtime meal money or local transportation fare that is required because of overtime work or security concerns, or in the case of public transit subsidies to nonemployees that are paid in cash. Thus, for example, if an employer gives an employee cash for a theater ticket, this cash is never excludible as a de minimis fringe, even though provision of the ticket itself may have been.
The regulations base this treatment on the theory that it is not unreasonable or administratively impracticable to account for such items. Under the same theory, the regulations say cash equivalents such as gift certificates or charge/credit cards (other than certain transit passes and occasional meal or transportation fare) are generally not excludible even if the property or service acquired would have been excluded if provided in kind. So, while that $25 holiday ham may qualify as a de minimis fringe, a $25 gift card to Hams ‘R’ Us would not.
|Jennifer Carsen, JD,is a Senior Legal Editor for BLR’s human resources and employment law publications, focusing on benefits compliance. In the past, she served as the managing editor of California Employer Resources (CER), BLR’s California-specific division, overseeing the content of CER’s print and online publications and coordinating live events and webinars for both BLR and CER.
Before joining CER in 2005, Ms. Carsen was a Legal Editor at CCH, Inc. and practiced in the Labor & Employment Department at Sidley & Austin, LLP in Chicago. She received her law degree from the New York University School of Law and her B.A. from Williams College. She is a member of the New Hampshire Bar Association.
Questions? Comments? Contact Jen at email@example.com for more information on this topic.
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Author: Jennifer Carsen, J.D., Senior Legal Editor