Employee discount dilemma

Feb 01, 2007

Fritz Wood
A colleague of mine was audited, fined, and required to pay back taxes for not claiming discounted employee pet care as taxable income on employee paychecks. He said that anything over a 20 percent discount must be taxed and listed as employee income. I checked with my accountant and he confirmed that I've been doing it wrong. How do I make changes in order to comply with IRS standards without upsetting my staff?

"You generally can't give more than a 20 percent discount on services, or else that value becomes taxable income to your employees," says Veterinary Economics Personal Finance Editor Fritz Wood, CPA, CFP. You can sell products to your team at cost, Wood says, but the IRS definition of cost includes shipping, handling, stocking, and maintaining inventory. Generally you can sell products to your employees at cost plus 10 percent. He suggests offering to pay for pet insurance, also taxable income, instead of providing deep discounts on pet care. "It's portable if they need a specialist, and it'll get your staff talking about pet insurance to clients based on their own good experiences," he says. "This is the only situation I've come up with to be completely fair, and to comply with our friends at the IRS."