Tax season is right around the corner.  Which fringe benefits are considered taxable compensation and which are de minimus?

Here are key areas to check to keep both your company and employees protected:

Employee discounts

The rule of thumb: Employee discounts are generally tax-free if they’re for the products or services your own firm offers.  But there are limits.

For merchandise, the discount’s tax exclusion is limited to the gross profit margin the firm makes off it.

Example: If your firm typically sells an item for $75 and it costs $50 to make, the gross profit margin is $25. A discount more than $25 is taxable.

For services, the limit is a 20% discount on the value of the service your firm offers.

Quantity and/or volume discounts may also be offered tax-free to employees, as long as they’re the same as those offered to the public.  Example: If your company offers customers a discount for buying 10 tickets, employees can get it, too.

What about external discounts on other companies’ products?  Officially, these are taxable fringe benefits, unless the perks have little or no monetary value. For example, some are available free to the public,  like supermarket “savers club” cards.

In reality, few firms withhold taxes on things like discounted gym memberships or entertainment books. Unless it’s for big bucks or you offer people numerous external discounts, you’re usually OK lumping them in as a de minimus benefit.

When is it de minimus?

The de minimus exclusion protects you from having to account for occasional small perks. Basic rules:

• it should be tied to a legit business purpose. Even cash is considered
  de minimus if it’s for occasional transportation fares or meal money.
• personal gain is limited. It’s fine  if folks get occasional personal use of the office copier, but unlimited use isn’t OK. The law says 85% of use must be related to your business.
• limited monetary value. In the case of group-term life insurance payable on the death of a spouse or dependent, it’s de minimus if the policy value is under $2,000.

Best bet: Check your state labor department Web site for current regs.

Tags: fringe benefits