Have you ever wondered why Ebenezer Scrooge didn’t throw holiday parties for his employees? Not only can they be expensive, but a year-end bash can also lead to liability claims and human resource complaints. Despite these downsides, 88 percent of companies are planning some sort of party for employees to celebrate the 2014 holiday season, according to one executive search firm. Here are some ways to maximize the pros — and minimize the cons — of your holiday festivities.
Are Holiday Parties Tax Deductible?
Business meals and entertainment expenses are generally 50 percent deductible for federal income tax purposes, if certain conditions are met. But the IRS allows some exceptions for holiday parties.
“Occasional parties or picnics for employees and their guests” qualify as de minimis (or minimal) benefits under Internal Revenue Code Section 132. This means that the costs of throwing a holiday party for your employees and their family members is generally 100 percent deductible for federal income tax purposes. It’s also not includable in the employees’ W-2 wages.
Door prizes, raffles and holiday gifts. The rules are less straightforward regarding these items. The IRS always requires employers to include cash payments as part of an employee’s wages. But gifts of holiday turkeys or fruitcakes are rarely required to be included, because they’re not worth much and it would be “unreasonable or administratively impracticable” to account for these benefits. Examples of door prizes to include on an employee’s W-2 are:
- Big-screen TVs, iPads or season tickets to sporting events. These have significant fair market value, so they won’t qualify under the de minimis benefits exclusion.
- $50 general merchandise gift cards. The IRS considers these to be cash-equivalent fringe benefits. Their value is obvious, so accounting for them isn’t unreasonable or impractical.
Holiday parties for customers, friends and the general public. Holiday parties for employees and their families — as well as the general public — are generally 100 percent deductible for federal income tax purposes. But expenses incurred for customers must meet the requirements for business meals and entertainment, and even then they’re only 50 percent deductible. Party expenses incurred for friends are not deductible, however.
To qualify as a business meal and entertainment expense, customer holiday parties must be for legitimate business purposes, cannot be extravagant and require proper substantiation, including who, when, and what was discussed and how much was spent.
To illustrate, suppose you host a New Year’s party that costs $5,000. Half of your 200 guests are employees, 50 are customers and 50 are friends. You allocate party costs based on the number of guests as follows:
- $2,500 to employee-related expenses;
- $1,250 to customer-related expenses; and
- $1,250 to friend-related expenses.
During the party, the owner announces the company’s newest product and allows customers to test it out. How much of the party expenses can you deduct?
If you maintain proper documentation — such as receipts, vendor contracts, a copy of the invitation, a signed guest book and a video of the owner’s speech — you can probably deduct $3,125. That equals 100 percent of employee-related expenses and 50 percent of customer-related expenses. The cost of hosting your friends is not a legitimate business expense, so it’s not deductible.
Many gray areas exist when it comes to deducting holiday party and gift expenses. It’s always smart to consult with a tax professional to make sure you get it right.
Budget-Conscious Doesn’t Necessarily Mean Cheap
A holiday party doesn’t need to break the bank. What’s most important is that everyone have fun and feel appreciated. To control costs, it might be a good idea to rethink the traditional definition of an office party, like these three companies are doing this year:
A small tool-and-die shop laid off several employees in October, so management decided that a lavish holiday bash might be in poor taste. Instead, the shop will have an in-house potluck lunch during work hours on December 31. The company will supply sub sandwiches and pasta and employees are encouraged to bring their favorite appetizer or dessert. No alcohol will be served and the office will close at 2 p.m., so employees can spend the last hours of 2014 with friends and family.
A creative agency swapped its traditional holiday dinner-dance for a catered holiday brunch that will be held on December 24, a notoriously unproductive workday. The office manager has hired an omelet chef and a professional bartender to serve limited drinks, including mimosas and eggnog.
A family restaurant won’t host its annual holiday dinner for workers this year. Instead, the restaurant will close on December 22 and employees will serve diners at a community homeless center. The owners hope the charity outing will foster goodwill and teamwork among servers, managers and employees. The event will also be videotaped and featured on the restaurant’s Facebook page as a public relations piece.
Other budget-conscious holiday party ideas include:
- Selecting a small establishment instead of a large, expensive restaurant;
- Providing limited menu and drink choices;
- Scheduling a party on a weekday; and
- Limiting the guest list to employees only (rather than allowing them to bring a guest).
Keep in mind that Uncle Sam may help subsidize your festivities: Holiday parties for employees are generally 100 percent deductible for federal tax purposes. (See the right-hand box.)
More than Money Is at Stake
Budget concerns aren’t the only reason companies opt out of hosting holiday parties. Some don’t want to expose themselves to liability claims and human resource complaints. Of course, one issue that comes to mind when planning a party is alcohol.
If your company hosts a holiday party where alcohol is served, your business could be responsible for the acts of intoxicated workers. Your exposure is increased if the party is held during work hours or on company property. This doesn’t mean you’re off the hook if the party doesn’t fall within those parameters, especially if attendance is mandatory or if workers are paid to attend.
Before a party, ask your insurer if your commercial general liability policy covers liquor liability. Also ask what exclusions, conditions and limitations apply. Failing to check this out could invalidate your efforts to economize if someone is injured or another legal issue arises. In some cases, you may want to purchase a separate special events policy.
Here are some other ways to prevent employees from over indulging and help minimize liability:
- Hire a professional bartender who is trained to recognize signs of intoxication and limit consumption when necessary.
- Be sure to serve a variety of nonalcoholic drinks, as well as food, throughout the night. Provide foods high in protein and carbohydrates, because they slow the assimilation of alcohol. Limit salty foods that make people thirsty.
- Make certain alcohol is not served to minors.
- Close the bar at least one hour before the party ends.
- Discreetly monitor employees and their guests throughout the party. If a guest appears inebriated, arrange for that person to get safe, reliable transportation home. Consider offering free cab rides to anyone who feels they cannot drive.
Employees Gone Wild?
As employees relax and socialize — especially after a few cocktails — some workers may engage in unprofessional behavior, such as politically incorrect jokes or even sexual harassment. Employers may be held liable and should always be mindful of sensitive issues during the holidays.
Although most companies would not hang mistletoe or stage a religious skit, your party could inadvertently offend an employee by overlooking issues such as gender, age, religion and dietary preferences. To illustrate, consider these human resource complaints that occurred after corporate holiday parties:
An all-female administrative staff at an engineering firm collectively complained about how the company doled out work during its in-house holiday luncheon. The women did all the setup and cleanup, while the male engineers ate, drank beer and played ping-pong.
A payables clerk complained that the background music played at the company’s holiday party was offensive. The owner had created an iTunes playlist made up exclusively of Christmas songs with religious messages. The employee suggested that next year, the owner should include some Hanukkah and Kwanzaa songs, nondenominational winter songs or classical holiday interludes without words.
A radiologist complained about her dining options at the hospital’s holiday pig roast. She was a vegan and a member of a religious group that does not eat pork. She also was offended that the pig was displayed in the middle of the buffet table.
When planning and hosting company parties, get to know your staff and try to throw a get-together that makes everyone feel welcome and included. If you receive a complaint, take it seriously and consult with an attorney. You may need to apologize to the employee, discipline co-workers if they violated corporate policies and take steps to prevent the issue from recurring in the future.
Important Notes: To limit your direct and vicarious liability, distribute a memo to all employees before a party. Remind them to drink alcohol responsibly and that, even at a party, they’re expected to follow the company’s sexual harassment and ethics policies. Managers and owners should also realize that employees look to them to set the tone for corporate holiday parties.
Maximizing Your Return on Investment
Whatever you choose to do — breakfast, lunch, dinner, alcohol or no-alcohol — the event should be about having fun and showing your gratitude to the staff for their hard work and achievement. Not only will you get to know your employees better, but it’s a chance to show them you care about them personally. Simple appreciation can pay dividends all year long.
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Brought to you by: McClanathan, Burg & Associates, LLC