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Are gifts to employees taxable?

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Question:

Are gifts to employees taxable?


Answer:

Almost every year, we receive this question or one similar to it. The end of the year and holiday season is a common time for employers to do something special for their employees, and the special treat normally comes in the form of some type of gift or bonus. In an employer's best efforts to avoid increasing their employee's taxable income, it is possible that IRS rules are being broken regarding the taxability of the gift. To determine the taxability of the gift, there are a couple of factors to keep in mind. 


1. Is the gift cash or a cash alternative? If it is, then the gift would be viewed as compensation by the IRS. Cash alternatives include items such as gift cards, gift certificates, and other replacements that can be redeemed for some type item with a monetary value. 


2. Would the item be considered a de minimis fringe benefit by the IRS? De minimis fringe benefits are benefits that the employee receives as part of their employment that are not large in fair market value. Common examples are occasional office treats, use of a photocopier, use of a printer, flowers, and other small value gifts. De minis fringe benefits are not taxable since they have low fair market value and are not easily tracked. If a gift would qualify as a de minis fringe benefit, then it would not be taxable. There is no hard number that is provided regarding what qualifies as a low fair market value gift, but the industry has standardized around $75.  

3. The last main factor to consider when giving a gift is whether the gift is truly disguised    compensation. Gifts should only be given infrequently for special occasions or events such as birthdays, holidays, company milestones, and other similar events. If a gift is being given every month or every couple of weeks, then the gift would be considered disguised compensation even if it meets all of the other rules. For example, an employer gives two of their employees 5 pounds of meat every other week. The gift is not monetary, and it would be considered a de minis fringe benefit because it has a low fair market value. However, if it is being given that frequently then it is considered disguised compensation. 

Going into these final weeks of the year, and the holiday season it is a prudent reminder to be careful when deciding what gift to give as a nontaxable gift. If you still want to give a large cash bonus, be aware that it is taxable and report the amount on the employee's W-2 at the end of the year. 

If you have any specific questions, please contact us and we would be happy to assist. 




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