Fringe Benefits and Taxable Income

Before an employer spends public funds on a gift to employees, it must consider the state constitutional prohibition on gifts of public funds.

Each year, public schools across the state give employees items emblazoned with the district logo, free meals, uniforms, and other benefits such as group-term life insurance. Are these items taxable income to the employee, even if it’s just a t-shirt?

Gift of Public Funds

In 1996, the Texas Attorney General clarified that plaques, flowers, and other small gifts may be allowable expenditures if the school board first determines through formal board action that these items serve a legitimate public purpose, such as increasing employee morale or productivity. Gift cards or debit cards are not appropriate for employee gifts as they are readily convertible to cash and might have the appearance of a cash bonus in violation of the prohibition on gift of public funds. In addition, cash or cash equivalent gifts from an employer must be reported as taxable income. Other gifts may also be reportable, taxable income if not covered by a de minimis benefit exception as listed on the Internal Revenue Service (IRS) website.

De Minimis Fringe Benefits

A de minimis benefit is one that, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical. De minimis benefits are excluded under Internal Revenue Code section 132(a)(4) and include items that are not specifically excluded under other sections of the Code. In determining whether a benefit is de minimis, you should always consider its frequency and its value. An essential element of a de minimis benefit is that it is occasional or unusual in frequency. It also must not be a form of disguised compensation.

Clothing

In most cases, clothing is a taxable benefit. For clothing to not be a taxable benefit, the clothing must be:

• Distinctive
• Specifically required by the employer
• Not worn away from work
• Not be suitable for taking the place of regular clothing

Employers providing full or partial uniforms to employees should require, in writing, uniforms to be worn at work and prohibit off-duty wear. In this case, the clothing is not a taxable benefit. Examples of clothing excludable from income because they aren’t suitable for everyday wear include firefighter uniforms, law enforcement officer uniforms, and U.S. Postal Service uniforms. Additionally, the cost of protective wear required, such as safety shoes or boots, safety glasses, hard hats, and work gloves, are not taxable.

The cost of buying and maintaining a shirt with the employer’s decal worn by the employee at the request of a supervisor, for example, a Friday spirit shirt, is taxable because these clothing items are appropriate for personal use.

Coaches often receive new attire each year, including shoes, sweatshirts, pullovers, and more. If the school provides these items, in most cases it is a taxable benefit. However, the University Interscholastic League (UIL) Constitution and Contest Rules Sub O, Section 481 allow a booster club to provide a coach gifts valued up to $500 annually in appreciation for their service as a coach, as long as the gift is not a bribe.  

Meals

Meals may or may not be taxable, depending on the situation. If meals are provided for the benefit or convenience of the district (e.g., meals provided so employees can be on-call, on-site), they are non-taxable.  If a district provides meals to more than half of the employees, they are also non-taxable. Meals that are provided to improve general morale or to attract prospective employees are generally taxable.

Consider All the Facts

Whether a benefit or gift is taxable income depends on all the facts and circumstances. If the benefit or gift provided to an employee does not qualify as de minimis, then generally the benefit must be included in income. Additional information about fringe benefits can be found in the IRS Fringe Benefit Guide.