Q: Our civil engineering firm is a member of a professional organization that is offering a new wellness program for our employees. Under the program our employees can voluntarily participate in a number of activities to promote good health.
These activities include getting an annual physical, participating in counseling sessions, taking online surveys to evaluate the employee’s health situation and a number of other tasks. The employee earns points for each of these activities, and when a certain point goal is reached our firm receives a $100 cash payment. While not required, it is our intention that this cash will be paid to our employees.
We understand that the payments will be income to our company and that when we pay them to our employees there will be an offsetting deduction. But we are not clear on whether the payments will be income to our employees and how it should be reported. Any advice?
A: This sounds like a great program and a nice benefit for the people at the firm. The wellness benefits, such as the annual physical, are tax-free under the employer-provided health benefit provisions. But the $100 payment will most likely be taxable to your employees, depending on how you decide to reward them for their participation.
Paying employees in cash or with a “cash equivalent,” such as a gift card or gift certificate, is taxable to employees regardless of the amount and will need to be included in their wages. Along with that comes the requirement to withhold the federal, Idaho, Social Security and Medicare taxes as you would on any payment of salary or wages.
But there are some non-cash fringe benefits that are not taxable to employees. So-called “de minimis” fringe benefits can be provided as a benefit to employees without the requirement that the employee pick up income. These benefits are generally small enough that accounting for them would be unreasonable or administratively impracticable and might include occasional theater or sporting event tickets (not season tickets), group meals or picnics for employees and their guests, or just coffee and doughnuts.
So holding a nice dinner for the participants or offering tickets to see the Steelheads play certainly is an option, although many employees may be more motivated to participate if they know there is a nice cash reward. You will need to evaluate your group and decide if offering the non-cash de minimis benefits will get the participation you are looking for, or if it is best just to give them the cash. A net $70 after-tax cash bonus is not as nice as a C-note in the pocket, but it may (or may not) be more attractive than a dinner with the boss.
To ensure compliance imposed by IRS Circular 230, any U.S. federal tax advice contained in this article is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed by governmental tax authorities. The answers in this column are meant to offer general information. You should consult your tax adviser regarding the specifics of your situation.
Peter Robbins is a partner in the Boise office of CliftonLarsonAllen, LLP specializing in tax matters for small businesses, individuals, and trusts and estates.
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