Posted on September 20, 2019September 21, 2019 by Jan Roberg

Deducting Di Minimus Fringe Benefits

Di minimus fringe benefits can be a better business deduction than gifts.

“Di minimus” sounds so fancy. It’s a Latin term meaning about minimal things. According to the IRS, a di minimus benefit is

one for which, considering it’s value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical.

According to the IRS website, an item over $100 could not be considered to be di minimus, but they haven’t actually given us an exact number of what is considered to be di minimus which makes things a little foggy. Is it $99? That’s probably pushing it. There’s an article by the Bradford Tax Institute that suggests $50-$70. I feel like that’s a pretty decent guideline.

I really like the di minimus fringe benefits rules because it gives me a little more room to work. If I’m buying a business gift, I’m limited to spending $25 per family for the entire year. Check out my post about What Business Gifts Can I Deduct on My Tax Return here. But if I’m buying something for one of my employees, I can use the di minimus rules and spend a little more.

What counts as di minimus fringe benefits?

Occasional snacks, coffee, donuts
Holiday gifts
Occasional tickets for entertainment events
Flowers, fruit, books etc. provided under special circumstances
Occasional parties or picnics
Occasional meal money or travel expenses for working overtime
Group term life insurance with a face value of not more than $2,000
Personal use of a cell phone provided by the employer primarily for business

What can never be di minimus?

Gift cards, gift certificates and cash – no matter how small the amount is. If you give a “gift” to an employee of cash, a gift certificate or a gift card, it must get included in her wages as W2 income. Not only will your employee pay income tax on the gift, but there will also be social security and medicare taxes as well.

What makes the di minimus fringe benefits so cool?

Well for one thing, they are tax deductible to the employer. As an employer, that always makes me happy. And, they are tax free to my employees, and that makes them happy. It’s a win-win for us all. And I’m not limited to the $25 a year gift rule. I can buy my employees birthday gifts, holiday gifts, and just “Hey, you’re awesome!” gifts, as long as it’s occasional and not being used to replace their income. Let’s get real here, flowers and candy will never replace a decent wage, you’ve got to do that first. But an occasional gift to tell them that they’re awesome on top of a decent wage? That’s a winner!

And those flowers, fruit baskets and books? The di minimus rules aren’t just for your employees, you can also give them to your corporate directors, independent contractors, partners in a partnership and even yourself!

The other really cool thing is that you can give your employees tickets to an entertainment event. Under the new tax law, entertainment isn’t deductible any more – but as a di minimus fringe benefit it is. You can’t give away season tickets, but you can give away tickets to a single show.

The IRS doesn’t give us a whole lot of guidance on these di minimus fringe benefits. They use the term “occasional” a whole lot without ever defining how often occasional is. The IRS uses the term “facts and circumstances” so I would think flowers for a funeral or a hospital gift for an illness would pass muster. And IRS Pub. 15-B specifically mentions birthday and holiday gifts so that should be okay too.

You may have heard the old saying, “Pigs get fed, hogs get slaughtered.” Do take advantage of the di minimus fringe benefit rules, just don’t abuse them.

Posted on September 20, 2015May 31, 2016 by Jan Roberg

Should Your LLC Be an S Corporation?

If your small business has reached the point where your self employment taxes are really hurting you, choosing an S Corporation status might be the answer to your problem.

If you own a single member LLC, the IRS considers that to be a “disregarded entity.” That basically means there’s no such thing as an LLC tax return. So, if you don’t make an “election” to taxed some other way, you’re taxed as a sole proprietor on your 1040 personal tax return. That means, you not only pay income tax on your LLC income, you also pay self employment tax on top of it. Ouch!

But as a disregarded entity, you may make an election to be taxed as an S corporation (or even a C corporation if you want to) instead of being a sole proprietor. So how do you know you might be ready to be an S Corp? Here’s my top three criteria:

1. Steady net income. If you have a loss on your business, that business loss can offset your other income on your tax return. One of the big benefits of an S corp is to reduce your self employment tax. If your business has a loss, you’re not paying self employment tax anyway so the S corp status wouldn’t provide much benefit there. A good rule of thumb, but certainly not a deal breaker, is to have a net income of about $50,000 to make the tax savings be greater than the additional cost of separate tax returns and payroll expenses. I work with business that have losses and still are S Corps. The $50K income isn’t a requirement, it’s just sort of a break even point on costs.

2. Separate Employer Identification Number (EIN) and bank account. If your business is set up as an LLC, you should have a separate EIN and a bank account for your business already. I’m always surprised by people who skip this step, but it’s important. You can get an EIN number for free, online. It takes about 5 minutes.

Learn more here.

And you really need a separate bank account. You don’t want to co-mingle your business funds with your personal money.

3. Discipline to make monthly payroll deposits and quarterly reporting. One of the requirements of an S Corporation is that the owner has to pay him or herself a reasonable wage. That means, even if nobody else works for you, you still need to write yourself a paycheck and pay yourself like an employee. If you’re already making your quarterly estimated tax payments–you’re probably able to handle doing a payroll. If you’re scrambling every year, you can’t keep on schedule etc, then I say don’t do the S corp. Not being up to date on your estimated payments can be a problem, but the IRS can get really nasty if you’re behind on payroll tax deposits.

If you have no discipline, and your business easily has enough revenue to handle the payments–and still want to do the S Corp, then pay the extra money to hire a payroll company to do it for you.

Setting a reasonable wage is usually the most difficult thing to determine. You want to go by what a person in your line of work would get normally get paid, that’s not always easy to figure. You should probably have your wage be at least 1/3 of your net income unless you can document that people in your line of work usually make less.

Now, these are just my guidelines. There’s really no “set in stone” criteria for S Corp status. And really, before you make any change to the status of your business, what you really should do is run the numbers. Sit down with your tax professional and – using the most recent tax return – run the business numbers as if you were an S Corp, a C Corp, and as a sole proprietor. Don’t forget to include the costs of your payroll taxes when running the numbers.

Everybody’s situation is a little different. Compare your numbers side by see to see if changing to an S Corporation makes sense for your small business. That’s really the best way to tell.

Posted on February 18, 2011May 31, 2016 by Jan Roberg

Why Your Take Home Pay Looks Messed Up

Photo by Christopher Titzer

The number one question I’m getting these days (okay, besides how big will my refund be?) is “What happened to my take home pay?” Hopefully, I’ve got some answers for you.

We’ve all heard that Congress voted not to increase our payroll taxes, but it looks like there’s more federal withholding being taken out of your paycheck. What’s up with that? Well, the income tax rate didn’t go up, but the “Making Work Pay” credit was taken out. Because that credit it gone, your payroll withholding has gone up (somewhere between $400 and $800 per year depending on your filing status.)

The other change that we’ve heard about is that the Social Security withholding went down from 6.2% to 4.2%. This makes your payroll withholding go down. Depending upon how much you make, this might give you more take home pay than before, for others, it’s the opposite. (Here’s a clue, the more money you make, the bigger this deduction will seem.)

If you get a pension, and not wages, the increase in the withholding will hit you harder because you don’t have social security withholding.

Now for many people, the payroll tax changes were not set up correctly for their first paychecks of the year. Please don’t blame your payroll department; the changes came so late in the year, that computer programs were not programmed for the new rules. This made for some crazy adjustments that showed up in later checks. Hopefully, by now, your paycheck should be normal.

It’s always a good idea to check to make sure your payroll withholding is right. The IRS has a withholding calculator that you can use to see if you’re on target for next tax season. You might want to wait another week or so to make sure that all of the payroll adjustments are done and that you’ve got a “normal” check to look at before running the numbers through the calculator. If you use a check with “adjustments” in it, the numbers will be crazy so make sure you’ve got at least two checks in a row that have the same withholding numbers in them.