Sometimes the most basic facts from study for CPA exam success are applicable throughout an accounting career. An ideal example is the attention a CPA provides to business clients in December by reminding them about potential tax traps from giving employee gifts.
Business owners are inclined to think that gifts have no income tax consequences. They may have heard from their accountants about how gift tax is completely different from income tax. This is why taxes on gifts are a distinctive area in courses for CPA study. However, the subject starts with an understanding of what comprises a gift.
According to IRS rules, a gift embodies “detached and disinterested generosity.” Conversely, holiday bonuses or seasonal gifts to employees are generally aimed at presenting an appreciation of work performance or inspiring future performance. Thanking employees in this manner does not meet the IRS guidelines for a gift. Therefore, several overlapping items from CPA study materials are applicable to determining the tax impact of employee gifts.
Gifts to employees that comprise compensation are added to reportable wages and subject to employment taxes. However, not all gifts to employees are taxed. A de minimis exception exists. This grants exclusion from taxable income of fringe benefits that are very small. When considering this aspect of tax law, accountants must apply some common sense because CPA review courses don’t provide a strict definition. The general standard for de minimis fringe benefits is that accounting for them is unreasonable or administratively impractical based upon value and frequency.
In most cases, the IRS considers items given only during the holiday season with values of less than $100 as de minimis fringe benefits. However, for small businesses, a gift valued at $50 or even $25 is possibly more than nominal. In any case, a gift of two concert tickets with a value of over $100 is not nominal according to the IRS.
Another key feature of employee gifts is that cash is always taxable income. This includes cash equivalents. Hence, an employee receiving from the boss a gift card for a retail establishment has compensation income. The business must report the gift card value as wages on the employee’s W-2. The worker owes regular income tax on the value. In addition, the business must include the gift card value on payroll reports and remit both the employer and employee portions of payroll taxes.
In summary, December presents opportunities for accountants to put toward practical use some knowledge from CPA exam study. In discussions with business managers, an accountant inquires about the existence of holiday gifts to employees. Then, CPA action is called for if any gifts exceed a nominal value or whenever they comprise cash or gift cards.
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Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.