De Minimis Benefits: IRS Rules and Compliance

A de minimis benefit is a small, infrequent perk provided by an employer, intended to be so minor that it would be impractical or unreasonable to consider it taxable income. Rather than allowing employers to decide what benefits are de minimis, the IRS has established strict criteria to determine what qualifies.

First, the value of the benefit must be minimal (usually interpreted as under $100), and its occurrence must be rare or unusual.

Cash and cash-equivalent benefits, such as gift cards redeemable for general merchandise, are always considered wages. Even when given as gifts or bonuses, they do not qualify as de minimis benefits. In contrast, certificates for specific, low-value items that are given infrequently and are impractical to account for generally qualify as de minimis.

If the benefit exceeds what can reasonably be considered de minimis, the entire value becomes taxable to the employee. These benefits must be reported on Form W-2 and are subject to income tax withholding, as well as Social Security and Medicare taxes if applicable. Businesses may optionally report these benefits in box 14 of Form W-2.

Exceptions

Special rules apply to tangible personal property awards for employee achievements, such as length-of-service or safety awards. These awards must not be disguised wages, must be given as part of a meaningful presentation and cannot include cash, cash equivalents, vacations, meals, lodging, tickets or securities. Additional conditions and dollar limits apply, which are detailed in IRS Publications 5137 and 535.

An exception also exists for occasional meal money or transportation fare provided to enable an employee to work an extended, unusual schedule. This benefit is not excludable for regularly scheduled hours, even if they include overtime, and the employee must actually work the additional hours.

If a benefit qualifies under these exceptions, it is excluded from wages, and no reporting is required.

For small businesses, the simplified reporting of low-value goods reduces administrative burdens. However, professional advice may be helpful to ensure compliance with IRS rules and avoid exceeding threshold amounts.