It’s the holiday season, and you're already looking for the ideal year-end gift for your hard-working employees. However, did you know with most bonuses and gifts—even small ones—the IRS will ask for its due share?
The Internal Revenue Service (IRS) considers all employers' gifts as compensation for the work employees have done. When giving gifts to workers, it’s important to understand how your generous acts can impact your business and employees tax-wise.
So, which employee gifts are taxed? Which ones aren’t? We’ll cover all that and more, so let’s dive in!
Are Gifts to Employees Taxable?
Gifts to employees are taxable unless they cost less than $100 and are given occasionally.
These tax-free gifts are called de minimis fringe benefits, which means their value and frequency are so small that accounting for them would be unreasonable or impractical.
So what qualifies as a de minimis or tax-free gift? Here are some guidelines:
- It's occasional or unusual in frequency.
- The individual item’s value isn’t more than $100.
- It's not a form of disguised compensation (like giving an employee a Visa gift card for their work on a project).
Examples of Non-Taxable Gifts
So, what are some examples of de minimis fringe benefits?
Say it’s your workplace tradition to celebrate an employee's birthday with coffee and a plate of cupcakes. Since it’s an annual event that costs the company little cash, the IRS doesn't consider that gift taxable compensation to the worker.
Other employee benefits the government considers de minimis include:
- Occasional doughnuts, snacks, and coffee bought for office staff
- One-time tickets to entertainment or sporting events
- Small gifts like flowers, fruit, or books given under special circumstances like the loss of a loved one
- Occasional transport or meal money for employees working overtime
- Holiday gifts with a low fair market value ($100 or less)
- Employees using the office copy machine for personal reasons, like occasionally printing their kids’ birthday party invitations
- Employees using phones you bought for work to text friends or play games
There are also cases where the IRS excludes employee achievement awards from taxable income. However, you need to stay within the limits it has set in this guide to fringe benefits.
For example, a length-of-service award must be tangible personal property and not involve cash, gift cards, gift certificates, securities, or other cash-equivalent benefits. You also can’t use the award as disguised wages and must give it as part of a meaningful presentation.
Examples of Taxable Gifts
So, what gifts are actually taxable?
Uncle Sam will tax any gift that’s cash or a cash equivalent, even if you're giving it out as a birthday or holiday present—unless a section of the Internal Revenue Code (IRC) excludes it.
Why’s that? The IRS finds it hard to believe you can give an employee a gift with no business purpose. It assumes your gifts are incentives for employees to offer more services in the future or you’re paying them for past work.
That means you and your employee owe your share of taxes on them.
Employee gifts subject to taxes include:
- Gift cards or gift certificates
- Season tickets to a game, theater, or other frequent event
- Membership to a country club
- Cars, bikes or any other item worth more than $100
Can an Employer Give a Personal Gift to an Employee?
Yes. But whenever you feel like being extra generous to your employees, remember Uncle Sam wants his share too.
So, always withhold income and employment tax for any taxable gift you give to employees—even if it’s outside the context of work.
What Taxes Do I Need to Pay on Employee Gifts?
Both you, the business owner, and your employees need to pay taxes on gifts that are cash or cash equivalents, valued over $100, or given frequently. These gifts are considered supplemental wages.
For employees, that means they need to pay federal income tax, FUTA, Medicare tax, Social Security tax, and any other state income taxes whenever they receive gifts from their bosses.
For employers, that means you need to withhold those taxes, deposit them with the IRS, and report the value of the gift on the employee’s Form W-2 the same way you would for the employee’s wages. Also, you need to pay the employer’s share of Social Security tax (6.2%) and Medicare tax (1.45%) on those gifts.
If you want to save valuable time during tax season, Hourly can issue and file those W-2s for you, and let employees view theirs online.
Withholding Tax from Gifts: Example
Let’s say you want to give an employee a gift card worth $150. Assuming the employee’s total tax rate is close to 30%, they’ll end up getting $105 after taxes are taken out.
Here's what that looks like:
Taxable gift = $150
Tax rate = 30% or 0.3
Net gift amount = Taxable gift x (1 – Tax rate)
Net gift amount = $150 x (1 – 0.3) = $105
However, if you want to give an employee the full $150 gift card, you'll have to add on extra money to make up for those taxes. Here’s the formula for that:
Net gift amount = $150
Tax rate = 30% or 0.3
Taxable gift = Net gift amount / (1 – Tax rate)
Taxable gift = $150 / (1 – 0.3) = $214.28
So, you'll need to give your employee a $214.28 gift card for them to take home $150 of it.
Now, does that mean you have to withhold tax even when you buy a cup of coffee for an employee? Not really. That’s where de minimis fringe benefits come in. As long as it’s less than $100 and given occasionally, you don’t need to pay taxes on it.
Giving Gifts to Employees? Uncle Sam Wants His Share Too
The gift-giving season is here and giving gifts to your loyal and hard-working employees is an excellent way to show appreciation and boost their morale.
However—we’ve already said this a ton, but we’ll say it again because it’s so important—always remember to withhold taxes and report the value of gifts or non-cash gifts worth over $100 on your employees’ W-2s as supplemental wages to avoid any tax consequences.
If you’re unsure about the tax implications of a potential gift you want to give an employee, talk to your tax attorney or accountant for guidance.