Are employee gifts taxable, and if so, which ones? While we’re on the subject - are some gifts tax-exempt, and why?
At PerkUp, we decided to put this complicated matter to rest once and for all!
If you’re looking to hand out rewards to your team, it’s important to have the full cost in mind. This doesn’t just mean the price of the gift - you should consider the tax implications as well. Gifts can play an essential role in employee recognition but also need to be financially feasible.
In this article, we’ll go over everything you need to consider concerning tax. It’s vital to do this before implementing an employee rewards program for your business.
When considering the tax implications of employee gifts, it’s critical to understand the rules and conditions surrounding this topic. Ultimately, the Internal Revenue Service (IRS) is the authority you should look to.
Technically, the IRS doesn’t consider ‘gifts’ a concept in business. Instead, in most cases, employee gifts get classified as compensation for work done.
There are some exceptions to the rule, but for now, know that such exceptions exist.
It’s important to note that the rules outlined in this piece are specific to the United States. As a result, these conditions may not apply if you live outside the U.S.
If that’s the case, we recommend speaking to a financial advisor. These professionals can help you understand your country’s rules and exceptions regarding taxable gifts.
As mentioned, the IRS considers most employee gifts to be compensation for work. According to the Internal Revenue Code (I.R.C.) § 102(c), gifts given to employees are not excluded from the employee’s gross income.
So, compensation from a business falls under income. As such, it is a taxable benefit, also known as a fringe benefit. As the gift giver, the company is generally responsible for paying the gift tax and making the necessary payroll deductions.
A few examples of taxable employee gifts include:
However, with taxes, it’s never that simple. The IRS does not consider every gift given as compensation, and we’ll discuss the specific conditions of tax exemption later.
In short, there are strict conditions to consider when determining whether to label your employee gifts taxable or exempt.
Gifts and compensation that take the form of cash, or cash equivalents, are seldom tax-exempt. The IRS considers those types of employee gifts taxable under almost all circumstances. This holds true for reward cards as they represent an alternative way to purchase items.
On the other hand, non-cash equivalent gifts may fall under the tax-exempt status. These include gifts like food, clothes, and stationery. This is because taxing gifts isn’t designed to disincentivize businesses from offering employee gifts.
The tax rule prevents companies from paying employees in gifts in an attempt to dodge taxes. This rule applies to gifts such as gift cards, gift certificates, and rewards cards. While this shouldn’t discourage businesses from using cash equivalents as rewards, it is worth factoring in.
Let’s talk about those exceptions to the rules. To understand these, we need to understand de minimis fringe benefits.
De minimis is a Latin term which roughly translates to ‘the smallest.’ De minimis describes anything that is of little consequence or not worthy of consideration. People use the term in legal or financial settings to disregard anything deemed insignificant to the matter at hand.
In the world of tax, the IRS designates certain types of items as de minimis. Items categorized as de minimis are not considered compensation and therefore are tax-exempt. These will not be included in an employee’s gross income.
Whether a gift qualifies as a de minimis benefit depends on whether that gift meets specific requirements. The IRS writes that de minimis benefits are anything with a value so low that accounting for it is unreasonable. The frequency of delivery also factors into whether said gift qualifies as a de minimis benefit.
It is worth noting that gifts do not have to meet both requirements to qualify as de minimis benefits. Also, since cash and cash equivalents do not qualify as tax-exempt, they are never considered de minimis benefits. This is the case no matter the value of money given or the rate of delivery.
With those exceptions in mind, the question of whether your gift is tax-exempt becomes a little more complicated. To make the process easier, we’ve prepared some examples of gifts and benefits that qualify as de minimis benefits. These gifts are therefore eligible for tax-exempt status.
Benefits given as holiday gifts receive more leniency when considered for a tax exemption status. This tax-exempt status comes with a list of requirements.
To become tax-exempt, holiday gifts:
Employee perks like an employee of the month title fall under de minimis benefits. Similarly, a private parking spot for the employee of the month does not have an actual value beyond convenience.
This means it qualifies as a de minimis benefit and is tax-exempt as well. Occasional rewards of complimentary coffee and snacks also fall under the banner of a de minimis fringe benefit.
By now, we’re confident you’ve come away with a better understanding of how tax works with employee gifts. Don’t let the idea of taxable gifts discourage you from using them in your business. Cash equivalents like PerkUp rewards cards are a great way to let employees choose their own incentives and rewards.
While de minimis rewards offer a small, enjoyable benefit, larger rewards encourage productivity and teamwork, even if they’re taxable.
We hope that you’ve armed yourself with enough knowledge to implement a cost-effective employee rewards program in your business. Your employees will love additional incentives!