“Ah taxation at Christmas time!” – Me
“Clark, that’s the gift that keeps on giving the whole year.” – Cousin Eddie
“That it is Edward, that it is.” – Clark Griswold
It’s the happiest time of year, and I don’t know about you, but in my house, “we’re going to have the hap-hap-happiest Christmas since Bing Crosby tap-danced with Danny f***ing Kaye!”[i]
Ah, Clark Griswold, that tragic bit of wonderful Americana. All of us have a Clark in our lives (some of us are the Clark Griswolds in our lives). But most of us have the ability to connect with Clark and his family’s holiday adventures. National Lampoon’s Christmas Vacation is a holiday staple in many houses. The hilarity of Clark stuck in the attic, the awkwardness of the grandparents invading the kids’ space, the uptight neighbors getting their comeuppance. All of it is pure holiday gold.
But, as with everything wonderful, there is a tax aspect that should be considered. Clark was expecting a Christmas bonus in order to cover the down payment he made on a new swimming pool, when instead, Clark is enrolled in a “Jelly of the Month” subscription. After a family kidnapping[ii] Clark’s boss reinstates the cash Christmas bonuses, plus 20% compared to what Clark received the year before. At this point, everyone is focused on the actions of Frank Shirley to rectify his “jelly of the month club” wrong, but let us, for a moment, consider the tax implications to Clark of his company’s actions.
First, we have to acknowledge that there are potentially two taxable issues at hand here: 1) what is the taxation of the jelly of the month club Clark is originally enrolled in; and 2) what is the taxability of Mr. Shirley’s bonus after he changes his mind?
1. Bonus as a Fringe Benefit
Generally speaking gifts, prizes, and awards of tangible personal property (other than cash or cash equivalents, such as gift certificates or gift cards) of less than a nominal amount, in total per year per employee, are excludable from the employee’s gross income as a de minimis “fringe benefit.” The nominal amount dollar threshold is not defined by the IRS so taxpayers are forced to determine what is appropriate for them as there is no specific IRS threshold for what is considered de minimis.
When the Tax Code was overhauled in 1984, the goal of the revision was to ensure that all gains were included under Section (§) 61 of the Internal Revenue Code (IRC) as gross income, including all types of fringe benefits. This created a huge headache for the IRS and resulted in numerous calls to congress from upset constituents. Because application of this standard to noncash benefits was one of the most difficult problems in developing generalized rules for the taxation of incidental fringe benefits, Treasury responded to congressional directives providing detailed regulations addressing many of the most frequently encountered valuation issues.
The general rule of inclusion under §61 is limited by §132, which provides the framework for permissible exclusion of certain fringe benefits from gross income. Section 132 provides eight excluded types of benefits: (1) no-additional cost services;[iii] (2) qualified employee discounts;[iv] (3) working condition fringes;[v] (4) de minimis fringes;[vi] (5) qualified transportation fringes;[vii] (6) qualified moving expense reimbursements (suspended for 2018 through 2025 except for certain active military duty);[viii] (7) qualified retirement planning services;[ix] and (8) qualified military base realignment and closure payments.[x] Clark’s issue is narrowly contained within the de minimis fringe benefit rule.
a. De Minimis Fringe Benefits —
De minimis fringe benefits are an excludable incidental fringe benefit, meaning it is not included in the wages of the employee receiving it.
Any property or services provided to an employee qualifies as a de minimis fringe benefit and may be excluded from the employee’s income if the fair market value of the property or service is so small that accounting for the property or service would be unreasonable or administratively impracticable.[xi] Thus, the scope of benefits covered in practical terms is determined by such benefits’ size and by administrative and accounting constraints. Where the amount is small, and the administrative burden of accounting for such is difficult, the benefit may be excluded from the taxable wages of the employee.
The character of the de minimis exclusion, particularly the fact that the benefits are, by definition, too insignificant to account for, limits the extent to which other restrictions can be applied. Thus, the nondiscrimination rules, line of business requirements and recipient limitations do not apply.
Clark’s enrollment in the Jelly of the Month club can avoid taxation potentially as a gift as well. The IRS has utilized its regulatory authority to confirm its long-standing position[xii] that traditional gifts on holidays, birthdays or similar occasions of property of low fair market value are de minimis fringe benefits.[xiii] These include such items as a turkey given for a year-end holiday, although the frequency with which such gifts are provided must be taken into account. I would think that it would be reasonable to put a “jelly of the month” club subscription into this same category.
Here, while, there is a specific cost of the Jelly of the Month club to the company, there is no such readily ascertainable value to Clark and “all of the other employees [Frank Shirley] rear ended this year.”[xiv] Therefore, Clark should be able to avoid having to pick up income associated with his Jelly of the Month club membership.
There is a different rule for cash, gift cards, or gift certificates that are distributed to employees, as there is a readily ascertainable value to such, and the employee is required to pick up such income annually and pay tax on it. Congress codified the IRS’s long-standing position[xv] that a cash fringe benefit or a cash equivalent fringe benefit (e.g., a gift certificate or gift card) is not excludible as a de minimis fringe benefit even if the benefit would have been excludible if provided in kind. [§274(j)(3)(A)(ii), added by Pub. L. No. 115-97, §13310, applicable to amounts paid or incurred after December 31, 2017.] In short, cash and cash equivalent fringe benefits (gift cards, charge cards, and credit cards) are never excluded from employee’s wages as de minimis benefits, regardless of the amount. These types of gifts must be included in the employee’s wages as taxable income on their W-2.
2. Bonuses as Taxable Wages
Generally speaking, bonuses are considered taxable wages to the employee. As noted above §61 provides that gross income includes all income from whatever source derived. Therefore, gross income specifically includes any bonus payment. In order for a bonus to be conserved wages, Clark must be an employee of NutratoX.
IRC §3121(d)(2) states the general rule that the term “employee” means any individual who, under the usual common law rules applicable in determining the employer- employee relationship, has the status of an employee. Considering Clark indicates he has worked for the NutratoX for 17 years, we can be comfortable in the assumption that he is an employee for all federal tax purposes.
Sections 3121(a) and 3306(b) of the IRC provide that the term “wages” means all remuneration for employment, with certain exceptions. Section 3401(a) of the IRC similarly defines “wages” as all remuneration for services performed by an employee for his employer.
In order for remuneration to be “wages” for purposes of the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and state and federal income tax withholding, it must be remuneration for services in employment, performed by an employee for the person employing him. Thus, in order for remuneration to be “wages” for income tax withholding purposes, it must be for services performed by an employee for his employer.
In Rev. Rul. 64-40,[xvi] the Service considered the issue of whether amounts distributed by a nonprofit membership organization to its employees out of a Christmas fund contributed to by the entity’s members constitute compensation in the hands of the recipients for Federal income tax purposes and wages for Federal employment tax purposes. In that case, the members each year collected a Christmas fund which it distributed among its employees. The revenue ruling concluded that the distributions constituted compensation for services performed by the club’s employees.
While there is not much to go on here with regard to Clark’s status as an employee, and any receipt of funds as “wages,” there is nothing to lead us to a contrary conclusion either. Clark has worked for NutratoX for 17 years, received a “Christmas bonus” every year, and generally meets the requirements for employee, therefore any payments made by the company to Clark should qualify as wages.
When Mr. Shirley has a change of heart and decides to give Clark the same bonus he received the year before, plus 20%, such a monetary payment would be included as taxable wages to Clark. Clark would have to pay FICA, FUTA, and all applicable state and federal withholdings on the amount of the bonus.
a. Bonus as Supplemental Wages
Cash bonuses, or even gift cards with a monetary value are considered “compensation” just like wages, and are therefore subject to tax as ordinary income reported on Form W-2 to the individual at the end of the year. This means, cash bonuses or gift cards in any amount will be subject to Social Security Tax, Medicare Tax, and income tax withholding (both state and federal). However, generally speaking bonuses are considered “supplemental wages” and are subject to withholding at the flat rate of 25%. The IRS specifies a flat “supplemental rate” of 25% for the federal withholding part of the bonus; this is the reason why the actual bonus amount ends up being much smaller than the original amount.
Well, there it is, a Christmas post about taxes. “Hallelujah! Holy s**t! Where’s the Tylenol?” — Clark Griswold. Have a very happy holiday everyone, and a prosperous new year!
[i] As so eloquently stated by Clark Griswold.
[ii] Ellen claims, “it’s our family’s first kidnapping,” but this is a bald-faced lie, as in the original vacation, the family kidnaps the security guard at Wally World, played by John Candy.
[iii] IRC §132(a)(1).
[iv] IRC §132(a)(2).
[v] IRC §132(a)(3).
[vi] IRC §132(a)(4).
[vii] IRC §132(a)(5).
[viii] IRC §132(a)(6).
[ix] IRC §132(a)(7).
[x] IRC §132(a)(8).
[xi] IRC §132(e)(1); Treas. Reg. §1.132-6(a). Compare TAM 200437030, where the IRS National Office advised that employer-provided $35 gift coupons redeemable at local stores were not excludible from employees’ wages as a de minimis fringe benefit because the gift coupons had a readily ascertainable value.
[xii] Rev. Rul. 59-58; Berkley Machine Works & Foundry Co. v. Comm’r, T.C. Memo 1968-278, aff’d per curiam, 422 F.2d 362 (4th Cir. 1970).
[xiii] Treas. Reg. §1.132-6(e)(1).
[xiv] Clark Griswold, addressing Frank Shirley about not getting a Christmas bonus.
[xv] Rev. Rul. 71-53.
[xvi] 1964-1 C.B. 68
