If you’re reading this, chances are you’re experiencing mild panic over the question of whether or not gifts you’ve provided your employees are taxable.
Every year we field tons of questions about this subject from people who did an awesome thing for their employees, only to realize they didn’t think about whether accounting needed to be notified of their expenditures. From holiday gifts, to tickets to sporting events for meeting company milestones, everyone wants to know: what are the tax implications for employee gifts?
The bad news is that the Internal Revenue Service (IRS) explains the answer to this seemingly simple question with a 4,000 page tax document that only CPAs can make heads or tails of. But the good news is that our in-house tax expert broke it down so we can give you everything you need to know in one short post!
Before we go any further, please note that this post applies to businesses located in the US. If you’re located outside of the US, different tax codes will apply. We also recommend speaking to your business’ accounting professional as each case will vary based on several factors.
That being said, here’s what you need to know about the IRS guidelines around employee
The difference between employee gifts and compensation
Right off the bat, you have to understand that the IRS doesn’t really even have a concept of a ‘gift’ in their vocabulary. For the most part, whatever employers provide to their employees are considered compensation provided in exchange for the work employees provide.
However, the exceptions to this rule allow for certain situations where employers can provide their employees with non-cash benefits that are not meant in any way to count as wages, or replacement of wages. This is where the definition of de minimis fringe benefit comes in.
Employee gifts are tax-exempt when they are considered de minimis fringe benefits
Being buried in the tax code is not enough: the answer to your question must also contain Latin.
In reality, de minimis fringe benefits are pretty straight forward. According to the IRS, a de minimis fringe benefit is, “one for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical.”
Some of the examples they include are:
- Occasional snacks, coffee, doughnuts, etc.
- Occasional tickets for entertainment events
- Holiday gifts
- Occasional meal money or transportation expense for working overtime
- Flowers, fruit, books, etc., provided under special circumstances
- Personal use of a cell phone provided by an employer primarily for business purposes
Since holiday gifts are literally listed in their examples of de minimis fringe benefits, it would seem like gifts to employees are tax-exempt! But this is not always the case. The type of gift you are giving, when you are giving it and who you are giving it to all play a role in determining if the gifts are taxable.
Here are a few guidelines that the IRS lays out for what constitutes a de minimis fringe benefit:
- It is “occasional or unusual in frequency”
- Cannot be disguised wages or supplemental wages (gifts that are meant to replace taxable compensation)
- Should not exceed a value of $100 (individual items)
Gift certificates, gift cards and cash equivalent benefits are never tax-exempt
This is something the IRS is very clear about. Even if they are given out as holiday or birthday presents from an employer to an employee, these types of gifts are never considered de minimis fringe benefits, and are thus liable to taxation. This is likely due to the fact that gift cards might be reasonably assumed to be disguised wages. Anything that is a cash equivalent will generally be regarded as a disguised wage, and liable to count as taxable income that should appear as part of an employee’s income.
As a general rule, avoiding paying higher income tax by disguising wages as gifts on a form W-2 is a huge no-no. Non-cash gifts that are meant to get around payroll taxes will inevitably lead to raised eyebrows from auditors. Cash-equivalent gifts are always risky.
However, a certificate that is redeemable for a specific item can be considered a de minimis fringe benefit if it meets the other requirements. Here’s an example:
- Gifting an employee a pair of socks = de minimis!
- Gifting an employee a gift card to a store that sells socks = not de minimis
- Gifting an employee a certificate that is redeemable for one pair of socks only= de minimis!
Non-cash gifts that aren’t gift cards are a great as employee achievement awards, or celebrating milestones in length of service. As long as they meet the above requirements, along with a few others listed on the IRS’s website, they should qualify as tax-free. Keep in mind that tangible personal property gifted for employee achievement awards, or service awards, must also be given as “part of a meaningful presentation.”
Long story short
Whether or not gifts for employees are taxable depends on the specifics of the gifts you’re giving, when you’re giving them and who’s receiving them. While the information above is a good outline of how the IRS thinks about gifting in the workplace, you should always consult with a tax professional before you decide what to declare and what not to.
Either way, we’re confident the return on your investment when you show appreciation through gifting will make it worth the cost, whether or not it’s taxed. Gift giving is a traditional part of the holiday season that the IRS’s definition of taxable income should not deter you from celebrating!
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