This time of year we get lots of questions about giving gifts to employees.
Are employee gifts taxable to the employee? What about gift cards or certificates?
The answer depends on the type of bonus or gift that you give. Each have varying tax consequences. Let's take a look at some of the most popular ones and their tax treatment.
Giving a cash bonus to employees during the holidays, or anytime throughout the year, is treated as taxable income to the employee regardless of the amount.
The amount of the bonus will be subject to payroll and income taxes as if they were normal wages.
A small property gift given to an employee will most likely be excludable from income as a de minimis fringe benefit.
The term de minimis is generally used to describe something that is too small or insignificant to be considered, something unimportant. It actually comes from a Latin phrase, "de minimis non curat lex," meaning the law does not deal with trivial matters.
So from a tax standpoint, a de minimis is a small amount not subject to taxation. The IRS says a de minimis fringe is "small in value compared to the amount of total compensation."
The IRS provides some examples of de minimis awards which can be excluded from employee's W2 wages:
- Holiday turkeys or hams
- Flowers, plaques, or coffee mugs for special occasions
- A gold watch on retirement
- Parking for an employee of the month, if the amount doesn't exceed certain limits
- Occasional award dinners or holiday dinners
Gift Certificates or Gift Cards
This has led to many questions about gift certificates and gift cards given to employees. Since they aren’t cash and tend to be relatively low in fair market value, many assume they are de minimis fringe benefits.
Just today a client texted me this question:
"We want to give $50 Macy's gift cards to our employees. Do we have to include this in their taxable income?"
- Cash or cash equivalent items provided by the employer are never excludable from income.
- Gift certificates that are redeemable for general merchandise or have a cash equivalent value are not de minimis benefits and are taxable.
Because gift certificates and gift cards are cash equivalents, or easily convertible to cash, they do not meet the requirements to be excluded from income.
Also, since the value of the gift card or gift certificate is easily determinable, they must be treated as wages, subject to payroll and income taxes.
Therefore, in the example above, the client must include the value of the gifts cards in the employee's gross wages, subject to payroll and income taxes.
How Do I Gross Up the Gift or Bonus?
Most employers want to give employees a nice round check for the holidays, like $500. They don't want to give them a check for $396.88 after taxes.
You can "gross up" the payroll so that the employer covers the taxes and the employee net check is $500 or whatever amount you want.
Paycheckcity has a "gross up" calculator you can use to help determine the net amount of a bonus check, allowing for payroll taxes. If you are one of our clients you can send us your bonus amounts and we will do the calculation for you.
What's the Moral of the Story?
If you give your employee a holiday ham, it will be excluded from their income. If you give your employee a VISA gift card to purchase a holiday ham, it is income to the employee, subject to payroll and income taxes!