It’s my annual “Taxes from A to Z” series! For the series, I’ll focus on terms that you might see on your tax forms and statements but not necessarily in the headlines. If you’re wondering whether you can claim wardrobe expenses or whether to deduct a capital loss, this is one series you won’t want to miss.
D Is For Discount.
Everyone likes a good discount. And one of the perks of working for some employers is an employee discount – a percentage off of services or goods that’s only available to employees. It’s a perk and for some employees, it’s an important one (I’m not gonna lie: it was hard to give up my Gap discount after grad school).
Typically, when you receive something of value from your employer, it’s considered compensation and therefore, taxable to you. There is an exclusion, however, when it comes to employee discounts: the value of an employee discount is typically excluded from your taxable wages.
There are limits, of course. With respect to services, you can exclude the value of a discount of up to 20% of the price that nonemployee customers would pay for the service. With respect to goods or merchandise, you can exclude the value of a discount up to the gross profit percentage times the price the employer charges nonemployee customers for the same property. Don’t worry: as the employee, you don’t have to figure this out, your employer does.
There is also an exception to the rule: discounts afforded to employees on real property and investments are not excluded.
Nondiscrimination rules also apply which means that highly compensated employees are subject to the same discount rules as everybody else – in other words, no special discounts for those who make more money. Highly compensated employees are those that owned at least 5% of the company at any time during the year or the preceding year or those that received more than $120,000 in pay for the preceding year (the wage limit isn’t applicable if the employee isn’t in the top 20% of employees when ranked by pay for the preceding year).
If you meet the criteria (or fall under an exclusion), your discount is simply a perk and there are no tax consequences to you. If, however, the value of your discount is taxable, your employer will report the value on your form W-2.