In 2020, the employer-employee relationship was forever altered. The COVID-19 outbreak disrupted industries, halted travel, and changed the way employees work. Employers have been forced to adapt to a tight employment market and workers’ needs. Some companies have decided to offer remote work opportunities and flexible schedules. With work from home becoming the norm, employers and employees have noticed a significant lack of the office culture that existed before the pandemic. To combat the disconnection between employees, some employers have been hosting internal networking events to allow them to interact with one another. The gatherings have boosted office morale and provided a safe outlet for employees to reconnect with their coworkers.
Hosting Internal Networking Events
If your business is hosting internal networking events or offering employees workplace treats, small prizes, or gifts, there could be tax implications. Under the Internal Revenue Code (IRC), a de minimis fringe benefit is excluded from an employee’s W-2 reportable wages. A de minimis fringe benefit is defined as “property or services, the value of which (after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees) [is] so small as to make accounting for it unreasonable or administratively impracticable.”
Generally, occasional employer-provided parties or luncheons for employees and their spouses or partners qualify as de minimis fringe benefits under the IRC. Additionally, common cited examples of small gifts that qualify as de minimis fringe benefits include company-branded items as well as achievement awards and plaques.
On the other hand, the receipt of extravagant gifts, such as a tablet or trip, are reportable to the employees that receive such prizes and gifts. Cash or cash-equivalent items provided by the employer are also included in the employee’s income. A gift card is considered a cash equivalent and is therefore treated the same way.
The IRS has provided an exception to that general rule if the gift card allows the employee to receive only specific items of personal property that are minimal in value, provided infrequently, and administratively impractical to account for. An example could be a gift card for a cup of coffee. Small gifts that are provided routinely also probably aren’t de minimis. For example, a one-time ticket to a sporting event may be de minimis, but season tickets are not. The employee’s W-2 wages should be adjusted to include the fair market value of any gift cards, extravagant gifts, and routinely provided gifts.
In addition to boosting employee morale, you will generally be able to fully deduct the costs incurred in providing the internal networking event. Similar to all deductible business expenses, you should retain all receipts, guest lists, and other records related to the gathering. In the event you are thinking of having steak and lobster for a surprise office luncheon, however, please note the IRS may disallow the deduction for a workplace event that it deems too lavish for the circumstances.
What if We Invite Clients, Too?
Because customer and client events are limited to a deduction of 50% of the cost for the gathering, you must track the number of customers, clients, and employees who attend the party. The pro rata share of the costs for customers and clients will be subject to the 50% limitation, and the costs attributable to the employees will continue to be fully deductible.
You should understand the potential tax implications of offering morale-boosting events and gifts in the post-COVID-19 work environment. If structured correctly, your company can offer a fun event that qualifies as a de minimis fringe benefit to the employee and results in income tax deductions for the business.