Updated for One Big Beautiful Bill Act – “No Tax on Tips” Provision
This article addresses the tax implications for a condominium, cooperative or homeowners association (“Association”) that maintains a “Holiday Gift Fund” for its employees. We have researched the issue of the fund’s taxability to Association employees for our clients. We have concluded there is potential tax liability to an Association for employer taxes relating to such holiday gift funds even though the board of an Association may not have approved the fund.
Pursuant to Section 61 of the Internal Revenue Code (IRC), “gross income”, is broadly defined, for income tax purposes, to include income from all sources, unless a specific statutory exception applies. Specifically, IRC Section 61(a)(1) includes in income “compensation for services, including fees, commissions, fringe benefits, and similar items”. The only provision that might conceivably exclude amounts paid from a Holiday Gift Fund is IRC Section 102 which generally excludes the value of gifts from the definition of gross income.
While there is ample case law to support the fact that amounts paid to employees, even without any obligation or expectation of future services, do not constitute gifts (for example, see Commissioner v. Duberstein, 363 US 278), IRC Section 102(c) addresses this issue directly. It states that: “Subsection (a) [which provides for an exclusion from gross income for gifts] shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee”.
Given the plain statutory language of IRC Section 102(c) and the absence of any other possible exclusion, it appears that such amounts constitute taxable income to the employee recipients.
With respect to payroll reporting, IRC Section 3401 defines “wages” for federal income tax withholding purposes. Similar to IRC Section 61, its scope is broad and includes all remuneration unless a specific exception applies. As such, the amount paid pursuant to a Holiday Gift Fund constitutes wages subject to federal income tax withholding. Internal Revenue Service Publication 15-B, Employer’s Guide to Fringe Benefits, similarly considers all fringe benefits to be taxable unless a specific exception applies. The list included in this publication are not applicable to a Holiday Gift Fund.
Under IRC Section 224, as enacted by the One Big Beautiful Bill Act (“OBBBA”), a deduction is allowed for “qualified tips” received by individuals in a definitive list of occupations. The IRS lists certain hotel, home maintenance and cleaning service workers that are able to deduct qualified tips. However, workers that service Associations such as doormen, maintenance workers and cleaning staff are not explicitly included in the list of occupations. As such, based on the IRS guidance release as of the date of this memorandum, any gratuities or bonuses contributed by residents directly to these service employees do not appear to qualify as deductible “qualified tips” under IRC Section 224.
In summary, we recommend that all amounts distributed to employees from a “Holiday Gift Fund” be included in taxable wages and treated identically to ordinary payroll compensation. This required the inclusion of these amounts on the employee’s Form W-2, Wage and Tax Statement. To execute this, all associated costs, including the grossed up distribution amounts, the employer’s portion of FICA, and state unemployment taxes, must be paid from the Holiday Gift Fund itself and should not be recorded as an expense of the Association.
If you have any questions, please don’t hesitate to call your WilkinGuttenplan advisor.
