Your workplace perks range from a cozy cup of coffee to a fully equipped company car. Though impactful and appreciated, these benefits fall into different categories when it comes to tax treatment: taxable fringe benefits and de minimis benefits.
For employers, offering benefits is a balancing act between making employees feel valued and managing the fine print of tax regulations.
It may be commonplace knowledge that traditional benefits like Health, Dental, Disability, Vision, and PTO are reportable. But what about the other perks you offer employees as part of your workplace satisfaction strategy—are they taxable as income?
We fell down the rabbit hole of Fringe Benefits to bring you guidance on which benefits can be excluded as employee income and how to ensure you are reporting correctly.
De Minimis – Big Impact, Minimal Investment
De minimis, Latin for “pertaining to minimal things,” is a phrase used to describe the smaller benefits you provide to your employees. Think of it as the little “extras” that make the workday more enjoyable without being heavy on the pocket—or the tax form. These are the small, often spontaneous perks that go a long way in brightening your employees’ day but don’t warrant much paperwork.
A box of holiday chocolates, a celebratory lunch, or access to the office’s snack bar or you bring coffee to your team when the work week has been tough, even arrange for flowers to be delivered to their home on their work anniversary. These are the benefits that fly under the tax radar because their value is so minimal. Do you have to report the value on employee W2’s as income?
According to the IRS, a benefit is de minimis if the value and the frequency with which it is provided is so small that it makes accounting for it unreasonable or impractical. It considers these perks as too trivial to count as income, so they remain untaxed.
We listed a few more examples of benefits that would not be considered income under Revenue Code section 132(a)(4) below.
- Controlled, occasional employee use of a company photocopier.
- Occasional snacks, coffee, doughnuts, etc.
- Occasional tickets for entertainment events.
- Holiday gifts.
- Occasional meal money or transportation expenses for working overtime.
- Group-term life insurance for employee spouse or dependent with face value not more than $2,000.
- Flowers, fruit, books, etc., given under special circumstances.
- Coffee and doughnuts provided on the business premises.
The key takeaway from these examples is that they are lower-value benefits and are not given with repeated frequency.
What fringe benefits are reportable as income?
On the other hand, taxable fringe benefits are bigger, more regular rewards— higher value and more meaningful. Picture the personal use of a company car, or that coveted gym membership. They enhance the employee’s lifestyle and make work-life more convenient, but they are also considered part of taxable income because they’re viewed as a form of compensation. Like a bonus, these perks are more than just a pat on the back or an occasional reward.
To help distinguish between benefits that must be reported as income and those that are exempt, we’ll review the most common and less common benefits you’ll have to categorize as employee income. Some of the examples below are very common, while other benefits might be common but are misreported.
- Cash or gift cards (OF ANY VALUE! – These are always reportable)
- Housing allowances
- Bonuses
These are more structured offerings. The value is easier to assess and simpler to report as part of employee compensation.
Company cars that employees use for personal purposes are taxable as well. Employers use several different methods to account for the personal use portion of the expense, such as GPS tracking, or more complicated methods like Cents per Mile and Annual Leave Method. The administrative burden and compliance risk have led many employers to move away from company-paid vehicles and instead opt for a vehicle allowance model, which is taxable as income but far easier to account for.
If you pay for memberships to fitness or country clubs for employees, these perks are also considered compensation. However, fitness rooms that are on-premise are not.
Other benefits classified as taxable income are:
- Group-term life insurance coverage over $50,000
- Use of employer vacation home
- Reimbursement of moving expenses
Creating the Right Mix of De Minimis and Reportable Benefits
In the grand scheme of employee benefits, de minimis perks may seem like small gestures, but their impact is anything but trivial. Whether it’s a Friday pizza lunch, a coffee run, or an occasional movie ticket, these tiny tokens create a ripple effect of goodwill. They help you show employees that you care in small but meaningful ways.
Small rewards nurture a positive work culture without breaking the bank—or the IRS rules.
That’s not to say the taxable benefits don’t make their own grand impact. Despite your employees being taxed for these extras and more administrative work on your end, they offer tremendous value. Reportable benefits like bonuses and company vehicles demonstrate that you’re not just concerned with day-to-day satisfaction but with an employee’s overall well-being, career development, and work-life balance.
By blending both de minimis and reportable benefit strategies, you’ll create an environment that is light and positive while solidifying your company as one that invests in employee long-term satisfaction.
For more discussions on reporting compliance and other payroll management advice, visit Valor Payroll Solutions and see how payroll is more than just calculating hours and pay rates.
