Are Gifts to Employees Taxable?
Did you know certain gifts are taxable income to the employees, which can irritate your employees and defeat the purpose of your gifts? Also there are reporting requirement for the business. If a gift is taxable income for employees, the employers must reported it on the employees’ W-2’s as taxable income. This can be avoided or minimized by planning ahead and knowing what types of gifts are not deemed taxable income and which ones are.
What type of gifts are NOT considered taxable income for employees?
Gifts which are considered de minimis benefits are not considered taxable income for employees. Per the IRS De Minimis Fringe Benefits publication, de minimis benefits are items for which the “value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical”. Examples of de minimis gifts are occasional snacks, flowers, and holiday gifts. The key words here are value and frequency.
Be sure to keep the costs of these items to a minimum for each employee. The IRS determines value and frequency per employee not lump sum for the company. Unfortunately, the IRS does not give amounts, so be careful. In the event of an audit you will need to be able to defend your choice of how a gift is treated.
What type of gifts ARE considered taxable income for employees?
The Internal Revenue Code (26 CFR 1.132-6(c) ) states “the provision of any cash fringe benefits is never excludable under section 132(a) as a de minimis fringe benefit”. The code goes on to state cash equivalent items are to be treated like cash. Some examples of cash equivalent items include prepaid cards, gift certificates, and gift cards.
If a cash or cash equivalent gift is given for a de minimis gift, it is still taxable. For example, an employer used to give out turkeys for Thanksgiving. To make distribution of these items easier, the employer gave gift cards instead. These gifts are considered taxable income for the employees.
Remember all taxable income given by the employer must be included on the employees’ W-2’s.
What other gift options are there?
Instead of giving cash as gifts to employees, give items which fall under the de minimis fringe benefits category. Throw a party at the end of the year or a fun filled picnic in the middle of summer. If you determine giving cash or cash equivalent gifts is still the way to go, you can help your employees with the increase in taxes. The gift amount can be grossed up to cover the taxes which the employees will owe.
What can you do to plan ahead?
Be sure to keep track of these throughout the year. This will help you in determining whether future gifts are de minimis and in making decisions about year-end gifts. Plus when it comes time for processing W-2’s, taxable gift information will already be available.
The best way to plan is to determine whether a gift is taxable income before giving the gift. If you are not sure, ask your CPA. This way you can ensure you are treating gifts correctly for tax purposes and making the right decisions for your company and employees.
Contributed by Jamie M. Shryock, CPA