Are Gift Cards Taxable Income to Employees?
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.
Cash Bonus
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.
Non-cash Gifts
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?"
According to the IRS,
- 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!
