Is There Tax On Gift Cards For Employees? (& Other Related Questions Answered)

It’s common to feel confused or uncertain about the complex issue and rules of tax when rewarding your employees. If your company uses gift cards that have a cash value attached to them, you may be wondering what the tax implications are. ‍

Sending awesome employee gifts, whether monetary or non-monetary, is an excellent idea for boosting morale and showing appreciation to your top performers. Gift cards are a common way to achieve this recognition and thus, it’s helpful to know the tax implications before getting buy-in from C-Suite and Accounts.‍

The last thing anyone needs is to receive approval for extending employee rewards on behalf of the company only to find out that the reward isn’t even effective due to sizable tax deductions. This article will help ease that uncertainty by tackling the complex issue of how gift cards are taxed. 

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Is There Tax On Gift Cards?

The short and simple answer is yes, there is tax on gift cards.‍

According to the U.S. Internal Revenue System (IRS) website, a gift card is classified as an additional compensation measure. It’s a fringe benefit that forms part of an employee’s total taxable package and must be reported as supplemental income on Form W-2. ‍

In other words, employers should take the gift card’s value and enter it into their payroll system. Federal taxes are then calculated for payment.‍

However, before doing so, it’s worth recognizing the type of reward you’d like to offer when loading funds onto a gift card. For example, what happens if you want to gift a team member an impromptu lunch? What if you’d like to reimburse a team member for out-of-town travel expenses related to a meeting they attended?‍

If your intention isn’t to send over a monetary incentive as a gesture of appreciation or as motivation, other factors could be at play. 

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When Are Employee Gifts Non-Taxable?

Since it’s been stated that gift cards are taxable, you could be wondering whether all employee rewards, gifts or even stipends fall into the same category. ‍

The long and short answer for this is only sometimes, although it’s relatively safe to say that cash bonuses are taxable income. ‍

One example of non-taxable benefits is de minimis fringe benefits (click on the provided link to read more about these benefits). ‍

As a quick overview, these are minimal fringe benefits that are not recorded as part of employee pay packages, even if they’re given as cash. They generally have a low market value, are specific and are given infrequently, thus making it impractical to account for them. ‍

You can also give other non-taxable employee benefits, such as professional development perks, productivity tools, or tech stipends. Learn more about the tax situation around these here.  ‍

This brief rundown shows you that there are instances where additional income and perks are non-taxable. ‍

However, to stay on the safe side of things, you should always plan to withhold tax on a gift card. Your Payroll or Accounts department can provide further insight into the matter if you choose to move forward with this reward.  

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Related: What Are Non-Taxable Fringe Benefits?

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What To Do About Payroll Tax and Gift Cards‍

In some cases, the tax deduction from the total value of the gift card can considerably decrease the amount available to use. This can mean that it doesn’t add as much value to the recipient and what is intended to be a gesture of appreciation from the employer, may end up being overlooked entirely by the team. ‍

It can raise questions from your employees, such as why would you even give them a monetary gift card ending with a random decimal number (this occurs after deductions have been made from a rounded sum)?‍

To prevent this from turning into a reality, you can ‘gross-up’ the value of the gift card. This is a calculation the company can do to cover the tax liability in full, ensuring the receiver enjoys the total intended gift amount.‍

This will ensure there are no surprises when rewarding or celebrating your employees with gift cards!‍

Why Reward Employees With Gift Cards?

Some of the most influential companies in the world recognize the value of rewarding their teams. They understand that by offering added perks into their work environment, the company reputation can be elevated in the competitive hiring landscape and help retain top talent. ‍

From work anniversaries to birthdays and random spot-rewards, there are many occasions where employees would appreciate rewards and gift cards are a productive way to accomplish this for them! ‍

Gift cards can be bought online, be monetary or non-monetary in nature, and can be delivered in a direct and timely manner. ‍

Whatever your preference, we recommend you use PerkUp to send your employees incredible gifts! You can easily set your team up with gifts from a curated list of products, send cash rewards, or deliver custom swag all in one platform. There are also tax advantages to sending employees actual gifts on their work anniversaries, rather than gift cards.

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Related: 7 Employee Rewards Ideas Your Team Will Love

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Final Thoughts

Now that you understand there is tax on gift cards, you can ensure you withhold the correct amount of tax from their pay.‍

The receiver will likely be thrilled to earn a supplementary income and you can reward them while having confidence knowing that you’ve covered your bases.

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Related: Alternatives to Gift Cards for Employees