A recent survey of small businesses revealed that only 12% of employees were satisfied with their benefits packages. HR will surely take up the challenge by offering all sorts of new and revised benefits. That means you’ll be playing peekaboo with perks that should be taxed as wages.
What employees want. Casual Fridays, meditation rooms, game rooms, flex time and bring-your-pet-to-work day are about as far as you can go without running into the tax man.
Those gourmet meals that tech companies are famous for providing may make employees’ mouths water, but they’ve also caught the attention of the IRS. The rule: Tax-free meals must be limited to cafeteria-style meals, the occasional morale-boosting meal (such as a pizza lunch), parties and meals provided to employees who must work late or remain on call.
You might want to sit down with HR before managers start doling out gift cards for employee-of-the-month. The rule: The value of gift cards is taxable to employees because they’re a cash equivalent. If you don’t want employees to pay the taxes, you’ll have to gross up the payment.
What’s tax-free: Items of low value that the company provides to employees on an occasional basis—coffee mugs, turkeys, hams, chocolates.
Employee discounts aren’t taxable, but you’ll have to get out your calculator and do some math. The rule: Discounts must be provided on a nondiscriminatory basis and, for merchandise, be limited to the gross profit percentage multiplied by the sales price. What is it: The gross profit percentage is gross receipts minus the cost of goods sold, divided by gross receipts. Result: Tax-free discounts on merchandise can be more than the typical 10% or 20% off. Discounts on services are limited to 20% of the sale price.
Loans by another other name are wages. Signing bonuses are one way to sweeten the pot to get highly skilled job candidates to choose your company. But signing bonuses, like all bonuses, are taxable.
Twist: What about an arrangement where the company extends loans to employees in the first and second years of their employment, which they’ll only have to pay back if they don’t stay with the company for, say, five years? A federal trial court recently ruled that this arrangement constituted taxable wages, because neither the employer nor the employees intended the arrangement to be a loan.
How to tell if it’s a real loan: Employees will sign promissory notes, financialwill be conducted to evaluate their creditworthiness, market-rate interest will be charged and a repayment schedule will be specified. (Vancouver Clinic, Inc. v. U.S., No. 3:12-cv-05016, D.C. W. Wash., 2013)