If you give your employees a gift card, is that considered a "de minimis" non-taxable gift? What if it's more (or less) than $25 in value?
Can I give my employee a gift card without being taxed?
When you want to show appreciation to your employees, can you give them a gift card without being taxed? The answer isn’t as straightforward as you’d think
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 turnover rates and boost employee morale.
Gift cards are a great option that work for all occasions; it allows your employees to spend it on their own time and is easy to buy and store. 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 tax on those gift cards.
When it comes to gifting, there are a lot of things employers can give employees as de minimis, which according to the IRS means that it is so small and provided so infrequently that it is unreasonable or impractical to account for it. Unfortunately, a gift card or any cash-related gift is not considered de minimis, even if it’s less than $25.
Learn more by watching our HR expert, Stacey Gibson, explain the rules around taxing gifts for employees.
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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 or cash equivalent is now taxable, regardless of the amount. The reason is because gift cards are essentially the same as cash, they are considered an easy item to be accounted for and, therefore, taxable.
The reason the IRS changed the rules has to do with protecting employee pay. If gift cards were exempt from taxes, it would encourage companies to restructure how employees are 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, a gift card given to employees is not considered a de minimis fringe benefit. Instead, it should be included in wages on Form W-2 and subject to tax withholdings.
What Gifts Can I Give To My Employees That Are Not Taxable?
If you still want to be generous and show your appreciation to your employees, consider the following:
- Occasional employee use of photocopier
- Employee snacks (coffee, doughnuts, soft drinks, etc.)
- 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. However, these companies had to track the minutes spent making personal calls vs. business calls under statutory laws. If certain conditions are met, mobile phones or reimbursed personal phones given to employees for business usage can be used for personal calls and remain tax-free as a de minimis fringe benefit. These conditions include:
- The employee has to be available 24/7 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
- The employee has to communicate with customers or clients in different time zones, and it is during the 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 SideWho would think that giving a gift to your employees would result in potential trouble with the IRS? There are many rules and regulations around what you can and cannot do, which is why having experienced HR consulting and support will keep you in compliance.
Stratus HR has been in business for over 20 years, and our team of certified HR professionals work every day with our clients, helping them stay on top of HR administrative tasks. If want to learn more about how to show appreciation to your employees, check out the following articles: