First and foremost, we wish our readers, one and all, Happy Holidays. At this time of the year, questions from employers about bonuses, gifts, and holiday pay come up fairly frequently.
We hope you will find the following helpful on those topics along with a few things to keep in mind for 2024.
End of Year Gifts, Bonuses, and Time Off
Tax Treatment of Holiday Gifts
Employers considering holiday gifts and/or bonuses to employees may be wondering about the tax implications. The general rule is that any remuneration provided to an employee is taxable as income absent an exception in the tax code. The primary exception to this rule can be found in code Section 132(a)(4), which excludes certain “de minimis fringe benefits” from taxable income.
The Internal Revenue Code (Section 132(e)(1)) defines a de minimis fringe benefit as “any property or service the value of which is so small as to make accounting for it unreasonably or administratively impracticable.” The determination of whether an item is de minimis must take into account the frequency with which similar fringe benefits are provided by the employer to employees.
“Traditional birthday and holiday gifts of property (not cash) with a low fair market value” and “occasional cocktail parties, group meals or picnics for employees and their guests” are among the examples of de minimis fringe benefits in the regulations.
Examples of de minimis fringe benefits include the following:
Traditional birthday and holiday gifts of property (not cash) with a low fair market value.
Occasional cocktail parties, group meals, picnics for employees or their guests.
Occasional theater or sporting event tickets.
Coffee, doughnuts, and soft drinks.
Flowers, fruit, books or similar property provided to employees under special circumstances (for example, on account of illness, outstanding performance, or family crisis).
Occasional personal use of the employer’s copying machine.
Local telephone calls.
Cash, Gift Certificates, or Gift Cards
Under the tax code, cash is never a de minimis fringe benefit and always taxable, no matter how little (except in the limited cases of money paid for a meal required because of overtime work or for local transportation that is required for security concerns). Similarly, cash equivalents, such as a gift certificate or charge or credit card is generally not excludable as a de minimus fringe benefit even if the same property or service the gift card is used for would be.
For example, IRS guidance provides that an employer’s gift of holiday hams to employees qualifies as excludable de minimis fringe benefits; however, the amount of the gift certificates that an employer gives employees to purchase the hams themselves is taxable income.
Bonuses: Gift or Wage?
The primary legal issue in the matter of the year end bonus is whether the bonus is essentially a gift or a wage. The implications are significant. If the bonus is a gift; the employer has the discretion to pay a bonus to some employees but not others, and, for hourly employees, the bonus is not figured into the calculation of overtime.
The terms in wage law are not however, “gift” or “wage”, they are “discretionary bonus” or “non-discretionary bonus.”
Discretionary bonuses do not figure into the calculation of overtime; they are excludable from the regular rate of pay. However, the federal wage law provides that a bonus is discretionary only if all the statutory requirements are met:
· The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine whether to pay the bonus;
· The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine the amount of the bonus; and
· The bonus payment is not made according to any prior contract, agreement, or promise causing an employee to expect such payments regularly.
Examples of some common bonuses that may be excludable discretionary bonuses if they meet the statutory requirements include:
· Bonuses for overcoming a challenging or stressful situation;
· Bonuses to employees who made unique or extraordinary efforts not awarded according to pre-established criteria;
· Employee-of-the-month bonuses;
· Severance bonuses; and
· Referral bonuses to employees not primarily engaged in recruiting activities (subject to additional criteria).
The label assigned to the bonus and the reason for the bonus do not conclusively determine whether the bonus is discretionary. While a bonus may be labeled discretionary, if it does not comply with the provisions of the statute, then the bonus is not an excludable discretionary bonus. The determination must be made on a case-by-case basis depending on the specific circumstances.
A discretionary bonus may not be credited towards overtime compensation due under the FLSA.
A nondiscretionary bonus is a bonus that fails to meet the statutory requirements of a discretionary bonus. Nondiscretionary bonuses are included in the regular rate of pay unless they qualify as excludable under another statutory provision (see below).
Examples of nondiscretionary bonuses that must be included in the regular rate include:
· Bonuses based on a predetermined formula, such as individual or group production bonuses;
· Bonuses for quality and accuracy of work;
· Bonuses announced to employees to induce them to work more efficiently;
· Attendance bonuses; and
· Safety bonuses (i.e., number of days without safety incidents).
Such bonuses are nondiscretionary because the employees have been told of the bonus and bonus targets and expect the bonus to be paid in the event of meeting the bonus standards. This includes periodic bonuses such as monthly or quarterly bonuses. The fact that the employer has the option not to pay the promised bonus does not make the bonus discretionary. For non-exempt employees, the payment of the non-discretionary bonus must be incorporated into the calculation of overtime for the period in which the bonus is earned.
Paying Employees for Holiday Closings
One of the typical year-end wage problems is in holiday pay. Many employers have policies which state that newly hired employees, both exempt and non-exempt, who have less than 90 days of service are not eligible for holiday pay. The wage law, however, calls for distinction despite the employer’s policy.
As a general rule, in Connecticut, holiday observance and pay issues are a matter of employer policy. There is no legal requirement that employers observe holidays or pay employees for holiday closings, although most employers do. Many employers require employees to work the day before or the day after a holiday to be eligible for holiday pay. An employer has no obligation to pay the non-exempt employee who does not meet the policy requirements for holiday pay. Moreover, hours of holiday pay are not hours of work for the calculation of overtime.
Exempt employees must be paid for the entire week for any week in which they work at any portion of a workweek. The exempt employee, despite being new, will be entitled to his or her full in the week in which a holiday falls, if the employee had worked in that pay week. An employer who violates the law by not paying the exempt employee for the holiday, risks losing the employee's exempt status.
New Laws and Deadlines for 2024
With the advent of 2024 comes some new laws which warrant attention from employers. Among them:
Minimum Wage Increases January 1st
As a reminder, Connecticut’s minimum wage will increase by $0.69 on January 1st to $15.69. It will adjust annually each January 1st thereafter based on the federal Employment Cost Index. Any annual increases will be announced in October for a start date on January 1st of the following year.
ACA Threshold for Affordable Coverage Lowered for 2024
As a reminder to large employers, the Affordable Care Act’s affordability percentage used for shared responsibilities will drop to 8.39% from 9.12%. For employers this means that if you set your employee premium costs last year right at the affordability threshold, your plan will no longer be affordable if you charge employees the same amount in 2024 as you did in 2023. The adjusted percentage applies on a plan-year basis, so plans will continue to use 9.12% to determine affordability in 2024 until their new plan year begins, if it does not begin at the start of the calendar year.
New Federal Reporting Requirement Under Federal Corporate Transparency Act
Beginning on January 1, 2024, many companies in the United States will have to report information about their beneficial owners, i.e., the individuals who ultimately own or control the company. The information must be reported to the Financial Crimes Enforcement Network (FinCEN). FinCEN is a bureau of the U.S. Department of the Treasury.
The requirement stems from the 2021 Corporate Transparency Act which creates a beneficial ownership information reporting requirement as part of the U.S. government’s efforts to make it harder for bad actors to hide or benefit from money laundering and tax evasion through shell companies or other opaque ownership structures.
Who Must Report
The reporting requirement applies to any business that was created by filing a document with a secretary of state or similar office under the laws of the state or Indian tribe.
In Connecticut, this will apply to most businesses. Twenty-three types of entities are exempt from the beneficial ownership information reporting requirements. These entities include publicly traded companies, nonprofits, and certain large operating companies.
When to Report
Reports will be accepted starting on January 1, 2024. If your company was created or registered prior to January 1, 2024, you will have until January 1, 2025 to report.
How to Report
Reporting companies will have to report beneficial ownership information electronically through FinCEN’s website: www.fincen.gov/boi
What Must be Reported
For each individual who is a beneficial owner, a reporting company will have to provide:
The individual’s name;
Date of birth;
Residential address; and
An identifying number from an acceptable identification document such as a passport or U.S. driver’s license, and the name of the issuing state or jurisdiction of identification document.
The reporting company will also have to report an image of the identification document used to obtain the identifying number in item 4.
Last Chance for EEO-1 Compliance
Although EEO-1 reports were due on December 5, employers that have not submitted and certified their data to the Equal Employment Opportunity Commission (EEOC) still have a chance to comply. Covered employers must submit and certify their reports as soon as possible, and no later than January 9, 2024, which the EEOC has stated is the “Failure to File” deadline.
Any private employer subject to Title VII of the Civil Rights Act with 100 or more employees during an employer-selected pay period in the fourth quarter of 2022 has a legal obligation to submit and certify an annual EEO-1 Component 1 report containing required workforce demographics. Likewise, federal contractors with 50 or more employees must submit and certify