Employee Gifts Aren’t Always Tax-Free
Many employers give gifts or bonuses to employees during the holidays. Giving gift cards is easy and widely touted, but gift cards can become an administrative burden and will give employees a tax surprise if they don’t know it’s coming. The Internal Revenue Service taxes gift cards (and gift certificates) even for just $5. This tax mandate means you must report the value of the gift card on the employee’s W-2 as supplemental wages and withhold taxes from their paycheck. The IRS taxes gift cards and certificates because it considers them a cash equivalent, even if it is only redeemable for a certain product or at a particular store.
All gifts, to remain non-taxable, should satisfy the IRS tests for de minimis fringe gifts. This definition requires the company to give as gifts property or services that are so small that accounting for the value of the gift would be unreasonable or administratively impractical, and such gifts must be offered very infrequently. Three tests must be considered in determining the appropriateness of a gift given to an employee:
• Value of individual gift given
• Frequency with which the gift is given
• Administrative impracticality of accounting for individual value
Examples of allowable de minimus fringe benefit, include, but are not limited to, the following goods or services, which are all subject to prior approval by department management:
• Typing of personal correspondence by other company personnel
• Occasional use of the company’s technology for personal use (photocopying, software, printing, etc.)
• Group meals or parties hosted for employees and their guests
• Company parties or celebrations
• Local, toll-free phone usage by employees during and/or after working hours
• Food, flowers, books, etc. that are provided to employees in special circumstances (illness, bereavement, outstanding performance, etc.)
• Occasional tickets to sporting or theatrical events
• Beverages and snacks provided by the company for employees
Examples of items specifically disallowed by the IRS as de minimus fringe benefit include but are not limited to:
• Season tickets to sporting or theatrical events
• Use of company-owned vehicles for more than one day per month
• Membership fees to a private club or facility
• ANY cash or cash equivalent item, regardless of amount, that should be treated as taxable income to the recipient, including coupons with a stated face value that can be redeemed for specified or unspecified merchandise
The gift cards should be entered on the payroll in the pay period when the gift cards are distributed to the employees. If the gift cards are for say $20, your payroll company can assist with the gross-up of the amount. The gift card typically would be treated as a “manual check” for payroll purposes on the payroll company’s side. There’s no need for the company to give a $25 card to cover the taxes.
For example, if an employee received a $20 gift card, the gross amount the payroll company may report is $21.71, depending on what taxes the payroll company grosses up. Breakdown would be:
. 49 City Tax
$20.00 Net Gift Card amount
If you still decide to give gift cards, you may want to alert your employees about the tax on the gift. Or, you could always give traditional standbys like turkeys or hams, as those are hard to value.
Phil Hann is an Auditor for Apple Growth Partners specializing in Construction/Real Estate audits, Not for Profit audits, and compliance audits. Follow him on Twitter at @PhillipDHann and Apple Growth Partners @Apple_Growth.