What "De Minimis" Means for Your Business Taxes

De minimis comes from the full Latin phrase, “de minimis non curat lex,” translating roughly to “the law is not concerned with trivial matters.” I wish I could say the same about myself, but I spent 30 minutes scrolling through Twitter to catch up on YouTuber drama.

Overview: What does de minimis mean in business?

The phrase de minimis comes up a lot in IRS rules. Something that’s de minimis is immaterial considering the bigger picture, whether we’re talking about employee benefits, investments, or another tax-related issue.

The IRS makes tax rule exceptions for specific types of employee benefits and investment income when the underlying dollar value is relatively low. For example, when a municipal bond’s discount rate is exceptionally low -- de minimis -- the investment income is taxed at a lower rate than in normal circumstances.

Small businesses most often use the phrase when talking about employee benefits. The IRS says you can leave off small gifts and perks from taxable employee compensation since it’s “unreasonable or administratively impracticable” to account for. You can still report the perk as a business expense on your small business taxes.

What are de minimis employee benefits?

De minimis employee benefits are insignificant and infrequent non-cash perks offered by employers. Unlike most fringe benefits, they’re not considered employee compensation and aren’t subject to federal taxes.

Fringe benefits are the ancillary extras that you offer employees aside from wages or salary. Some benefits, like daily commutes or gym memberships, must be reported as taxable compensation to employees. Other benefits, like health insurance premiums, are exempt from payroll taxes.

However, de minimis benefits fly under the radar and aren’t taxable to your employees because they’re so small and occasional. For example, it’s de minimis benefit when your business pays for an employee’s late-night cab ride home from work or buys a cake for an employee’s birthday.

Both examples satisfy the two de minimis benefit principles of insignificance and infrequency. Unlike most other fringe benefits, you don't report them as compensation on your employees’ W-2 tax forms and in your tax software. Your company can still take a business tax deduction for the purchase.

Examples of de minimis benefits

Here are the most common de minimis employee benefits.

1. Small gifts

De minimis benefits most often fall under the small gifts category. When you give employees a small non-cash or cash-equivalent gift (we’ll get to that in the next section), you don’t need to add it to their taxable compensation.

Say it’s tradition in your office to enjoy a plate of cupcakes on an employee’s birthday. Since it’s an annual thing that costs the business entity relatively little money, the gift isn’t construed as taxable compensation to the employee.

Annual holiday gifts, when they have a low dollar value, are also considered de minimis benefits. You can count products and services worth $100 or less as de minimis gifts.

Other small gifts might include flowers for the loss of an employee’s loved one or occasional tickets to entertainment events.

2. Transportation

There have been a few times when I’ve been at work after the D.C. metro has closed, leaving me with rideshare as the only way to get home. The company I worked for covered the late-night ride home every time as a thank-you for being there past my regular 9 p.m. bedtime.

As an employer, you can cover an employee’s late-night ride home as a de minimis benefit. It has to be offered only occasionally, and the trip has to be local.

3. Meals

When I worked late, I also often got a paid-for dinner so I could keep working through dinnertime. Just like the ride home, it wasn’t taxable to me.

When occasional and for the business’s convenience to keep the employee at work, meals are considered de minimis. The de minimis meal benefit also applies to supplying employees with coffee, tea, and snacks.

However, the meals offered to employees can’t depend on the number of hours worked in a day. If employees earn $5 in meal money for every hour worked after 8 hours in one day, the additional compensation is taxable.

4. Personal use of a copying machine

You don’t have to ding employees with additional payroll taxes for printing return labels for personal online purchases.

However, the machine falls into taxable benefit territory when it’s used too much for personal reasons. Make sure you’re using the copy machine at least 85% of the time for business. Feel free to blame me the next time you need to tell your employees to stop printing their children’s birthday party invitations at work.

5. Personal use of business phone

It’s fine if your employees play a little Among Us or text friends on their business phones. At least, that’s what the IRS says. When you issue business phones to make your employees’ work lives more manageable, their personal use is not taxable.

However, you can’t bait employees with business phones to “promote goodwill, boost morale, or attract prospective employees” and call it a de minimis benefit, according to IRS Publication 15-B. Your intentions must truly be to make working more efficient.

What are not considered de minimis benefits?

De minimis benefits -- exceptions to regular fringe benefit rules -- come with their own list of exceptions. Let’s talk about the exceptions to the exception.

1. Cash

The IRS wants to keep employers from disguising compensation as de minimis benefits. That’s why any sort of cash benefit cannot be considered de minimis, even if it’s a few bucks.

Handing an employee a $20 bill for staying late cannot be called a de minimis benefit. However, it would be of no tax consequence to cover the employee’s dinner while they’re working or reimburse a ride home.

2. Gift certificates

You can’t skirt the de minimis rule by giving your employee a $20 Visa gift card instead of cash. Gift certificates that can buy “general merchandise” or have equivalent cash values trigger a payroll tax liability for your business and the employee.

Taxes are no de minimis matter

While the amount you spent on de minimis benefits isn’t significant, how you treat it on your business tax return matters. Make sure you’re properly accounting for employee benefits to avoid issues with the IRS and state tax authorities.