Are employee gifts tax-deductible? If you’re asking yourself this question - you’ve come to the right place.
Rewarding employees is one of the best ways to motivate and retain top talent. It shows your appreciation for a job well done and can be used as a tool to incentivize your team.
There are many types of employee rewards and they all have different tax implications - some are fully tax-deductible and others may be taxable.
Let’s discuss what makes employee gifts tax-deductible and which gifts can be classified under this term.
We’ll also touch on how these gifts differ from those considered taxable by the IRS. Hopefully, you’ll gain a better understanding of which employee reward ideas work best for your business.
A few conditions must be met for a gift to be considered tax-deductible. The gift must be given in connection with an employee’s job performance. This means the gift cannot be given for personal reasons, such as a birthday or holiday.
The gift must also be given as part of a bona fide compensation arrangement. It must be given in exchange for services rendered or as a bonus for meeting certain objectives.
The IRS allows businesses to deduct up to $25 per employee per year for these gifts. For performance and protection awards in real property, you can deduct up to $400 per employee per year.
Employees will not be taxed on these gifts.
Taxable gifts are those given for personal reasons, such as birthdays or holidays. These gifts are not connected to employee job performance and are not given as part of a compensation arrangement.
The IRS will not allow your business to deduct the cost of these gifts from your taxes. However, employees will be required to pay income taxes on the value of the gift.
So, what makes employee gifts tax-deductible?
Gifts considered tax-deductible are those given in connection with an employee’s job performance or as part of a compensation arrangement. These gifts can be deducted from your company’s taxes, and your employee will not be required to pay income taxes on the value of the gift.
Related: Which Employee Gifts Are Taxable?
Yes, rewards cards are considered tax-deductible employee gifts - as long as their value falls under the $25 per employee per year limit. If you gift employees cards with values above this limit, they must be reported.
There are a few different types of employee gifts that are tax-deductible. These include:
Tangible property includes gifts that can be physically touched - such as a book, desk set, or piece of jewelry. These gifts are typically given to recognize an occasion such as retirement.
The IRS will allow your company to deduct the cost of these gifts from your taxes, up to a limit of $400 per employee per year. This means that if an employee receives a gift valued at more than $400, your business will not be able to deduct the total value of the gift from your taxes.
Gift cards and certificates are considered tax-deductible employee gifts. For gifts that can be used similarly to money, your company can deduct $25 per employee per year.
To qualify as a tax-deductible gift, gift cards and certificates must be given as a result of the employee’s job performance. If gift cards are given as personal gifts, they are not tax-deductible.
Therefore, if you give your employees a $50 gift card as a performance incentive, only $25 of each will be tax-deductible.
These awards are given to recognize an employee's length of service with a company. They can be anything from a plaque or trophy to a gift card or cash bonus.
Note that only employees who have served for five years or more are eligible for a tax-deductible service award. The value of the award is also capped at $400 per employee per year.
Tax-deductible employee gifts are a great way to show appreciation to your employees while also getting a little tax break.
We hope this article has given you some ideas of employee gifts that are both appreciated and tax-deductible.
Remember to stay within IRS limits. This will ensure that you comply with the law and can avoid any penalties.
Also, keep records of receipts or documentation to substantiate your deductions. This will come in handy if the IRS ever audits you.