Revenue Ruling 79-50: Tax on Employee Discounts

Revenue Ruling 79-50 establishes a tax principle regarding employee discounts on company property. This guidance clarifies that when a company offers employees a discount of more than a “relatively small value,” the economic benefit represents a form of compensation. Such arrangements are not treated as simple price adjustments but are considered remuneration for services performed.

Determining Taxable Income from Employee Discounts

Revenue Ruling 79-50 specifies that employee discounts not of a minimal value are treated as wages for tax purposes. The taxable income is the difference between the property’s fair market value and the price the employee pays. Fair market value is the price at which the property would be sold to a regular customer at the time of the employee purchase.

For example, if a retail company sells a product to the public for $1,000 and allows an employee to purchase it for $600, the $400 difference is the taxable amount. The employee has received an economic benefit that would not have been available if not for their employment status. This principle applies to any property the employer offers in the normal course of business.

The ruling focuses on the substance of the transaction over its form. It prevents what would otherwise be a transfer of value from escaping taxation simply because it is framed as a discount rather than a direct payment. The determinant is whether the employee receives a measurable economic advantage that is more than incidental.

Employer Tax and Reporting Obligations

Once the taxable income from an employee discount is determined, the employer has tax and reporting duties. This income is treated the same as a regular salary for payroll tax purposes, and the value of the discount must be added to the employee’s gross wages for the pay period.

These withholdings include federal income tax, Social Security, and Medicare (FICA) taxes. The employer is also responsible for paying its share of FICA taxes and including the discount’s value in the wage base for calculating Federal Unemployment Tax Act (FUTA) taxes. The employer must ensure that these tax obligations are met in a timely manner, consistent with their regular payroll deposit schedule.

The total value of these taxable discounts provided throughout the year must be reported on the employee’s annual Form W-2, Wage and Tax Statement. The amount is included in the totals for Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages and tips).

Interaction with Qualified Employee Discounts

The principles of Revenue Ruling 79-50 are now viewed with modern tax law, specifically Internal Revenue Code Section 132. This code section establishes certain fringe benefits that can be excluded from an employee’s gross income, including a “qualified employee discount.” A discount on property is qualified and non-taxable if it does not exceed the employer’s “gross profit percentage,” which is calculated based on the employer’s sales and cost of goods sold.

If an employee discount on property exceeds this gross profit percentage limitation, it fails to be a qualified employee discount under Internal Revenue Code Section 132. In such cases, the principles of Revenue Ruling 79-50 apply. The amount of the discount in excess of the allowable limit is considered taxable compensation.

For services, a discount is qualified if it does not exceed 20% of the price at which the service is offered to non-employee customers. Any discount on services greater than 20% would similarly lose its tax-free status. While Internal Revenue Code Section 132 provides a safe harbor for modest discounts, Revenue Ruling 79-50 remains relevant for the tax treatment of price reductions that fall outside these statutory protections.