Withholding required on employee discounts taxed to employees

Only employees can qualify for a nontaxable fringe benefit. Under Code Sec. 132(a), an employee is defined as an individual currently employed by the employer, an individual who has retired from the employer, has become disabled while working for the employer, or is an employee’s widow/er or dependent children under age 25. An individual not within this circle is not an employee for purposes of the fringe-benefit exemption. Moreover, Reg. §1.61-21(a)(4) provides that a taxable fringe benefit is included in the income of the employee.

While a “qualified-employee discount” may be excluded from income, the employer must show that the discount does not exceed 20 percent of the price at which its services are offered to customers (published rates). The taxpayer argued that its “employee discount” should be based on the discount rates it provided to corporate customers instead of its published rates. However, in order for the pricing and discount rules of Reg. §1.132-3(b)(2)(iv) to apply, the employer must show that 35 percent of its sales are comprised of discount rates given to discrete customers or customer groups, each group’s discount and the percentage each group contributes to total sales.

Since the discount offered by the taxpayer exceeded 20 percent of the published rate, it exceeded the amount allowed under Code Sec. 132(c)(1)(B) and the excess amount was includible in the employee’s income as a taxable fringe benefit. In addition, the taxpayer must collect and pay over employment taxes on the excess discount provided to its employees. (Field Attorney Advice 20171202F, March 24, 2017; 2017ARD 067-5.)

Visit our News Library to read more news stories.