​What You Need to Know about Employee Gifts and Taxable Income

With the holidays in full swing, a lot of employers will be planning to give their employees gifts. And the IRS, much like Scrooge, will want a cut.

So, here’s a Q&A to help employers and employees know what’s taxable and what isn’t.

Q. What’s the maximum amount on a gift card I can give my employees before we’ll need to report it as taxable income?

A. *Cue some Scrooge music* In most cases, $0.01.

Yep. With few exceptions, the IRS considers cash fringe benefits — or cash equivalents — taxable.

The IRS does have rules about “de minimis fringe benefits.” So, let’s say you have your employees a gift certificate that could only be exchanged for their Christmas ham. In that case, the IRS doesn’t consider that amount taxable, as long as it doesn’t exceed $100.

But cash or cash equivalents are almost always taxable.

Q. This year, our vendors presented gifts to our employees during our holiday party. Some of the presents were pretty substantial, like airfare and hotel stays. Although we distributed the gifts, we don’t have any other connection to them. Are they still taxable? Should we report them?

A: Yep, they’re taxable, and you should report them. The key here is that you distributed them.

In the future, if you want to avoid this kind of situation, you can have your vendor present the gifts. That way, there’s truly no connection between you as the employer and your employees as recipients.

If the value of the gifts is more than $600, the vendor would need to report the gift and send your employees a Form 1099.

Q: We're planning a Christmas party for our employees and their kids. The kids will all receive bags of candy, and we’re going to give out coupons to a local Christmas tree farm. Are there tax implications for our employees?

A: This is a good example of the de minimis fringe benefits noted above.

If you offer infrequent benefits to your employees — with a fair market value so small that it’s impractical to account for it — you can usually exclude that benefit from your employees’ gross income.

So, in this case, the bags of candy and the coupons seem to fall into that category. Make sure that the coupons don’t have any cash value though. Otherwise — you guessed it — it’s likely taxable.

Have other questions about gifts and taxable income? Let us know.