In what seems like another lifetime, I worked for one of the “Big 4” accounting firms.
I worked closely with a partner who served as the firm’s executive compensation specialist. From this connection, I learned a lot about sophisticated compensation strategies for highly paid executives.
Highly paid people seem to like … high pay. This may be a generalization, but a Fortune 100 executive with a $1 million salary seems, from my experience, to also want stock options and deferred compensation arrangements tailored to the highly paid.
This is an observation more than a criticism. Many of us have heard the saying, “It’s the little things that count.” My experiences suggest that those who love their jobs appreciate the little things.
This may be because the jobs that are the most lovable often do not come with the big things – the salary, stock options and deferred compensation plan.
Let’s then talk about the tax consequences of giving little things to those people who know that such things count the most. Surprisingly, these consequences may not always be clear.
The tax law has a section devoted to things called “certain fringe benefits.” This section deals with the little things. The things valued by those outside of the executive suites.
The smallest of the small benefits is called, appropriately, a de minimis benefit. This is described as one that is so small it is not reasonable to expect the employer to account for it.
Who could prize such a possession? Please feel free to disagree, but I believe that many people do. This is precisely why the tax law had to devote a section of a section to the benefit.
In a given calendar year there come days in which members of my family feel compelled to give me things. My birthday. Father’s Day. Christmas. They have complained loudly about these days.
Why the long faces? Because they claim I never provide any ideas of things that I want. This is an unusual trait in my family. But I have given them ideas. Make me a card, I say. My daughters have on occasion done this. From elementary school forward. The last one I received was three years ago when my daughter got married. I have kept them all.
I love my job of being a family member. So I just want to feel valued. The cards are of small value to anyone else. Too small to be valued. Priceless to me.
The tax law has an interest in the value of rewards bestowed upon workers. Executives deemed worthy of stock options and deferred compensation had better seek tax counsel before they agree to the employer plan.
If you can’t get high pay from your job, what is it you want? Perhaps kind or encouraging words. Even the tax law has nothing to say about words.
What of gestures of kindness or encouragement? Now we’re getting closer to a tax issue. Gestures can be made with gifts. Things. Things that may have value.
These gestures are within the purview of “certain fringe benefits.” A staff appreciation lunch at a nice restaurant. A gift card to a favorite store. A birthday or work anniversary celebration.
When the law says too small to account for, we can’t read that too literal. A staff luncheon comes with a bill and a receipt. It can be accounted for and probably is so someone can be reimbursed.
But when spread among the various participants, the cost per person is quite small. It would not be reasonable to make entries in the company payroll system to impute taxable income.
At some point it may be “reasonable” to expect an accounting. Weekly appreciation luncheons for the staff add up. The adding may take some effort, but the end result, per worker, is no longer “too small” to worry about.
The original legislation, enacted in 1984, gave a holiday turkey as a de minimis example. There are limited holidays. Not all are associated with turkeys.
Even if your job does not come with occasional turkeys (and I don’t mean co-workers), the legislation makes the point that the benefit must be occasional. A small gesture of appreciation or recognition. Priceless. And not taxable.
Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.
