You Could Be Taxed on That “Non-Taxable” Employee Benefit

A benefit frequently offered to employees is discounts on products or services that the company sells. Under the Internal Revenue Code, all benefits provided to an employee are taxable, unless they are specifically excluded from income or defers tax on the benefit.

One example of deferring tax on the benefit would be employer contributions to a pension plan for the employee. This is not subject to income tax at the time received, but is taxed then the employee begins making withdrawals from the plan upon retirement.

Discounts on products or services provided to employees are not subject to tax if they meet certain criteria. A discount on services up to 20% of the prices charged to customers is not taxable to the employee. For example, if the individual is employed in a law firm and the usual rate for clients is $200 an hour, the employee could receive a 20% discount on that rate and the benefit would not be taxable.

Additionally, the employee may receive a discount on merchandise or other property up to the price charged by the customer times the gross profit percentage. To put that in more understandable terms, this generally means that the employer can sell the merchandise to employees at cost. As long as the price to the employee is equal to or greater than the company’s cost, the benefit is not taxable.

Oftentimes, the employer’s discount program may specify that employees may make this benefit available to a certain number of individuals – spouses, family, or friends of the employee. This can create a tax problem. For purposes of excluding the discount from taxable income, IRC section 132 (c) defines an employee as:

1. An individual currently employed by the employer
2. An individual who retired from the employer, became disabled while employed, or a widow or widower of any of these.
3. Spouses and dependent children of any of the above mentioned individuals.

I don’t see any mention of extended family or friends in that list. Oops! The IRS has stated that only individuals as defined above qualify for a nontaxable fringe benefit. So, you make the benefit available to your friend, uncle, or other relative? The value of the benefit is taxable income to you. No good deed goes unpunished.

The value of the benefit is the amount of discount received. So, if you obtain an item that normally sells for $100 and pay $80 for it, the amount of the benefit is $20. If you, or a listed family member obtain the item, there are no tax consequences. If the item is obtained by some other individual that you have specified to receive the benefit, then you have $20 in taxable income. Of course, there is no rule against you purchasing the item for yourself, then giving it away to some other individual.

Contact John Stancil at 863 226-2867.https://www.taxconnections.com/taxblog/you-could-be-taxed-on-that-non-taxable-employee-benefit/#.WWPVYOvyvRZ

Author: Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.