Here on HR Bartender, we’ve talked about the partnerships HR needs to have in the organization with finance, risk management, and marketing…just to name a few. One very important partnership that we haven’t spent much time covering is the partnership between human resources and payroll. Today’s reader question deals with that:
I am trying to find out if employee discount programs that companies sign up for (to offer their employees discounts) have tax consequences for the employee and/or company when the discounts are redeemed. The many discount companies I speak to say no, but I thought you might have more advice. Thank you.
To help us figure this out, I asked Kellie Jones, senior director of products, pay, and tax at Ultimate Software, if she would share her expertise. Luckily for us, she said yes. Please remember that Kellie’s comments are not a replacement for speaking to an attorney or accountant about tax laws.
Kellie, it might be helpful to start with a few definitions. What are benefits, perks, and discount programs?
[Jones] Employee benefits are typically any additional non-wage compensation provided to the employee beyond their typical salary or hourly wage. Traditional benefits include employer-offered healthcare, a 401(k) program, and vision benefits. Organizations are getting more and more creative with their benefit programs to attract and retain talent.
Perks are extras that go above and beyond traditional benefits. These can range from having a foosball table in the break room to offering employees free tickets to sporting events throughout the year. They are used to help drive employee engagement and loyalty, as well as help reduce turnover.
Employee discount programs are programs that give discounts at local shops, such as 10 percent off for tickets to the local theatre or memberships to the neighborhood gym.
Since this reader note deals specifically with discount programs, what are some common types of employee discount programs? Why would an organization offer employees a discount program?
[Jones] Employers often offer discount programs as another way to show appreciation for employees. These programs can help new employees who have recently relocated to quickly identify possible service providers of interest in the area.
Some common employee discount programs include local restaurants, gyms, dry cleaners, entertainment venues, technologies (e.g., computers, software, phones), and even travel! Some unique discount programs include flowers, boat memberships, car sales, pet daycares, and even hair salons and spas!
From a payroll perspective, are benefits, perks, and employee discount programs taxed differently?
[Jones] Like many things tax related, the answer is “it depends”. In the United States, these types of benefits are classified as fringe benefits, and there are rules about what is taxable versus what is excluded from payroll taxes.
Many perks may be classified as de minimis, which are excluded from payroll taxes. Examples of de minimis perks include occasional tickets to theatres and sporting events, as well as invitations to company-hosted parties and picnics.
The Internal Revenue Service (IRS) has an employer tax guide to fringe benefits available on its website that covers many scenarios, from achievement awards to tuition reduction and everything in between. For those companies with Canadian employees, the Canada Revenue Agency (CRA) and Revenue Quebec have similar guidelines, which dictate some smaller perks excluded from taxes.
If an organization offers employee discount programs, are there some things they should consider (in making the decision)?
[Jones] Here are five things organizations should keep in mind:
- Do the perks or programs align with your organizational culture, as well as the makeup of your organization. A millennial, a baby boomer, and a family with smaller children may each value different products and services.
- Is there a perk that can be offered that’s unique to your organization? That helps strengthen relationships and increase engagement with employees, and it can serve as a competitive differentiator and recruitment tool.
- Does the perk/discount align with the organization’s benefits strategy? For example, offering employees discounts at local gyms and nearby healthy-eating options may supplement an existing employer’s wellness program and encourage employees to make healthier choices in their everyday lives.
- How would employees redeem the discounts? Can they access offers from their mobile devices? How easy is it to redeem?
- Who is the target audience? From a payroll-tax perspective, consider how you’re offering these discounts and whether they’re targeted to all employees or only to highly compensated employees. Offering to the latter has payroll-tax implications, specifically in the United States.
My thanks to Kellie and our friends at Ultimate Software for sharing their knowledge with us. If you want to learn more about payroll related matters, be sure to check out Ultimate’s resources page – it’s filled with white papers, webcasts, and case studies that can make your life easier.
At a time when recruiting, engaging, and retaining talent is a challenge, every little thing helps. That includes employee discount programs. But organizations need to choose the right ones and administer them properly.
Image captured by Sharlyn Lauby at the 34th Street Graffiti Wall in Gainesville, FL