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[ Tax and International Operations ]

De minimis Fringe Benefits: Taxability of Gift Certificates and other Awards

The IRS has issued an opinion that gift certificates, gift cards, and gift coupons which have a face value on them are considered cash equivalents and therefore are subject to employment taxes without regard to their value. This includes gift certificates which cannot be converted to cash. It may also include theater tickets and tickets to sporting events. Gift certificates or gift cards to Barnes and Noble, American Express, etc., which are given to employees for any reason and for any amount are taxable to the employee. A gift coupon operates the same way as a cash equivalent fringe benefit such as a gift certificate. Accordingly, its value must be included in the employee’s gross income (Technical Advice Memorandum 200437030).

The Internal Revenue Code (IRC) section 132(a) provides that de minimis fringe benefits are considered non-taxable, except when they are in the form of gift certificates, gift card or gift coupons. Although only employees may receive de minimis fringes, all recipients of fringe benefits are treated as employees for this purpose.

The exclusion for de minimis fringe benefits is limited to situations where the benefit provided by the employer is small in value. What constitutes an acceptable dollar limit is based on facts and circumstances which take into consideration the value and the frequency of the benefit as well as administrative practicability limitations. Guidance is provided that "non-monetary achievement awards having a fair market value of $100 or more would not qualify as a de minimis fringe".

In addition to being of small value, to qualify as de minimis, the benefit must be provided infrequently. Frequency is measured by the number of times a particular employee receives the benefit; that the benefit is not frequently provided to employees generally is irrelevant.

Some common de minimis fringe benefits include occasional cocktail parties or picnics; occasional supper money or taxi faire because of overtime work; traditional birthday or holiday gifts of property with a low fair market value; occasional tickets (not seasonal tickets) to the theater or sporting events; coffee, doughnuts, and soft drinks; group meals; local telephone calls; and flowers, fruit, books, turkeys or hams, or similar property provided under special circumstances, such as illness, outstanding performance, or family crisis provided the requirements of de minimis fringe benefit rules are otherwise met.

However, distribution of any cash fringe benefit (regardless of dollar value) is never excludable as a de minimis fringe benefit. For example; American Express gift certificates should be includible in an employee’s taxable income and treated as wages subject to withholding requirements, regardless of the dollar value.

In general, gift certificates as awards or incentives are in violation of current policies.  However, the Senior Business Administrator and Dean must approve a policy waiver if the following conditions are met:

1) Written approval must be obtained from the Senior Business Administrator and Dean.

2) Department Documentation and Reporting Responsibilities for Employees

a) Departments that purchase cash converting gift certificates or that purchase certificates using a Procard, must provide a quarterly listing to the Manager of Payroll of the eventual certificate recipients. For the fourth quarter, the list of certificate recipients must be submitted by November 30. The Payroll Office will manually add to an employee's gross wage the value of any awards granted to an employee.

i) Questions should be addressed to dofpayroll@pobox.upenn.edu

b) Note: For tax reasons, employees should not be given cash converting gift certificates after November 30th of each year.

3) Special Nonresident Alien Requirements

a) Cash converting gift certificates awarded to nonresident aliens are subject to federal tax withholding. Withholding rates vary based on whether the recipient has applied and is eligible for tax treaty status and whether the treaty addresses such payments. The total amount of a cash converting gift certificate will be reported to the IRS on form 1042-S or W-2.

i) Questions should be addressed to: doftaxoper@pobox.upenn.edu.

4) Total Awards that Exceed $600 to Non-employees

a) If the total amount cash of converting gift certificates and other cash awards made to any individual other than employees or nonresident aliens exceeds $600 in a calendar year, the total cash equivalent value of awards made to the recipient will be reported to the Internal Revenue Service on Form 1099-misc as other compensation.

b) The department must collect a W-9 for each ‘award’ and submit a report quarterly to the Accounts Payable department which includes a listing of the recipients, the dollar value of the gift certificate/award and a copy of the W-9.

Please refer the Comptroller’s web site to review the policies associated with the distributions of gifts;

Policy  #2326 Gifts Based on University/Employee Relationship,

Policy  #2326.1 Gifts Based on Non University Personnel.

If you have any questions or concerns, please contact us at doftaxoper@pobox.upenn.edu.

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