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When you want to show appreciation to your employees, can you give them a gift card without being taxed? The answer is not as straightforward as you would think.
Learn more by watching our HR Director, Stacey Gibson, explain the rules around taxing gifts for employees.
One way you can show your staff you appreciate their hard work is to give them a gift. Many small business owners love giving their staff members thoughtful gifts as a sign of gratitude for their efforts. After all, enhancing employee satisfaction and experience can help employers decrease their turnover rate and boost employee morale.
Gift cards are a great option that work for all occasions; your employees can use them on their own time and they are easy to buy and store. But before you start stocking up for your next holiday party, it’s a good idea to check whether or not you’ll have to pay taxes on those gift cards.
At Stratus HR, we can help you unravel the complexities of employee gift taxation. Our seasoned HR experts will guide you through every step, ensuring compliance and informed decision-making. Book a free consultation and let us help you appreciate your employees the right way.
When it comes to gifting, there are a lot of things employers can give employees as de minimis fringe benefits. De minimis benefits, according to the IRS, are benefits so small and provided so infrequently that it would be unreasonable or impractical to account for them. Unfortunately, a gift card or any cash-related gift is not considered de minimis, even if it’s less than $25.
Gift cards are considered cash equivalent items and must be reported as taxable income. They fall under the category of cash equivalent fringe benefits, which means their value must be included in an employee's wages and may be subject to withholding for Social Security and Medicare Tax.
Why Are Gift Cards Not Considered “De Minimis” By The IRS?
Historically, there was a threshold of $25 as the maximum amount one could give before having to be taxed, but that is no longer the case. A gift card is now taxable, regardless of its value amount. The reason is because gift cards are cash equivalents, which are easy to be accounted for and, therefore, taxable.
The IRS changed the rules to protect employee pay. If gift cards were exempt from taxes, it would encourage companies to restructure how employees were paid to save money on taxes. Employees may receive lower compensation with the addition of gifts, which would reduce their taxable income and payroll taxes.
The bottom line: no matter the amount, gift cards given to employees are not considered de minimis fringe benefits. Instead, they should be included in wages on Form W-2 and subject to tax withholdings.
It's important to note that other benefits similar to gift cards are also treated as taxable fringe benefits, which are subject to federal taxes.
What Can I Give To My Employees That Is Not Taxable?
If you still want to be generous and show your appreciation to your employees, nontaxable fringe benefits can be a great alternative to gift cards if you would like to provide perks without additional tax burdens. Consider the following alternatives:
Occasional employee use of photocopierEmployee snacks (coffee, doughnuts, soft drinks, etc.)
Gift certificates for occasional meal money or transportation fares
- Tickets for entertainment, such as theater or sporting events
- Holiday gifts, such as a turkey or ham
- Flowers, fruit, books, etc., provided under special circumstances (illness, death of a family member, individual recognition)
- Personal use of a cell phone provided by an employer for business purposes (more on this below)
- Meal money or other qualifying expenses when working overtime
Be sure to keep any of these qualifying gifts to a minimum and under $100, as the IRS has ruled that if a gift ever exceeds the value of $100, then the item must be taxed as a whole. That means any flower arrangements given as a form of congratulations or sympathy should be less than $100 or else the employee will need to be taxed for the full value of the flowers.
Is A Cell Phone Considered A Tax-Free De Minimis Fringe Benefit?
It is common for companies to give their employees cell phones to make business phone calls. If certain conditions are met, mobile phones or reimbursed personal phones given to employees for business usage can also be used for personal calls and remain tax-free as a de minimis fringe benefit. Examples of those conditions may include:
- The employee needs to be available at any time in case of work-related emergencies,
- The employee might need to be in contact with colleagues beyond regular working hours,
- The employee needs to reach customers or clients while out of the office, and
- The employee needs to communicate with customers or clients in different time zones outside their regular office hours.
For more information, please visit the IRS page on de minimis fringe benefits.
Navigate The Complicated World of HR With Experts At Your Side
Who would think that giving gift cards, a gift certificate, or any other type of gift to your employees could result in potential trouble with the IRS? There are many rules and regulations around what you can and cannot do, such as knowing which parts of supplemental wages are subject to federal income tax.
Adding experienced HR consulting and support will help keep your company compliant. At Stratus HR, our certified professionals work with clients every day to help them stay on top of HR administrative tasks and in-the-know regarding local, federal, and state employment laws. This includes navigating the complexities of federal income taxes, social security tax, and Medicare tax compliance.
With nearly 25 years of being in business, Stratus HR is the right outsourcing partner for you. To learn more, please book a free consultation.