Each year, school districts across the state give employees shirts emblazoned with the district logo to wear throughout the year, sometimes on a specific day of the week. In addition, coaches receive new gear, including shoes, sweatshirts, pullovers, and more. Are these items taxable income to the employee, even if it’s just a t-shirt?
Q: What should we know before giving gifts or clothing to employees?
A: Before a school district spends public funds on a gift to employees, it must consider the state constitutional prohibition on gifts 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 probably 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 a district must be reported as taxable income. Other gifts may also be reportable taxable income if not covered by a de minimis benefit exception.
Q: What is a de minimis benefit?
A: In general, 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 which are not specifically excluded under other sections of the Code. These include such items as:
- Controlled, occasional employee use of photocopier
- Occasional snacks, coffee, doughnuts, etc.
- Occasional tickets for entertainment events
- Holiday gifts
- Occasional meal money or transportation expense for working overtime
- Group-term life insurance for employee spouse or dependent with face value not more than $2,000
- Flowers, fruit, books, etc., provided under special circumstances
- Personal use of a cell phone provided by an employer primarily for business purposes
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.
Whether an item or service is de minimis depends on all the facts and circumstances. In addition, if a benefit is too large to be considered de minimis, the entire value of the benefit is taxable to the employee, not just the excess over a designated de minimis amount. The IRS has ruled previously in a particular case that items with a value exceeding $100 could not be considered de minimis, even under unusual circumstances.
Q: If we give employees a shirt to wear does it meet the de minimis exception, or is it a taxable benefit?
A: It depends, but in most cases, the answer is yes, it 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, and not be suitable for taking the place of regular clothing. Therefore, the cost of buying and maintaining a shirt with the district’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.
Q: What could qualify clothing as a de minimis fringe benefit?
A: Items designed for a one-time usage are considered de minimis and are not a taxable benefit. In determining whether a benefit is de minimis, consider its frequency and its value. An essential element of a de minimis benefit is that it is occasional or unusual in frequency.
Q: What’s the best practice for providing uniforms to employees?
A: Districts providing full or partial uniforms to employees should require employees (in writing) to wear the uniforms at work and prohibit them from wearing them off-duty. In this case, the clothing is not a taxable benefit.
Examples of clothes and upkeep excludable from income and not taxable to the employee because they aren’t suitable for everyday wear are in the realm of firefighter uniforms, law enforcement officer uniforms, and USPS worker uniforms. Additionally, the cost of protective clothing required, such as safety shoes or boots, safety glasses, hard hats, and work gloves, are not taxable.
Q: What about coaches? Is the clothing they’re provided a taxable benefit?
A: In most cases, clothing provided by the district is a taxable benefit. Clothing items, including those with district logos, are typically appropriate for personal use and suitable for everyday wear.
However, UIL rules (see 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