Navigating Tax Implications of Gifts to Employees: Leveraging De Minimis Fringe Benefits on Employee Gifts

As the holidays rolled around, my colleague turned to me wondering if employee gifts are considered taxable income by the Internal Revenue Service. With over 150 employees to shop for, staying within budget while spreading holiday cheer posed a challenge. She asked, “Are the employee achievement awards we give out considered taxable compensation?”

I explained that gifts that are cash equivalents like gift cards are always considered taxable income. However, tangible personal property gifts up to $25 are usually tax-free. Any gifting amount above $25 is subject to income tax unless it qualifies as an achievement award under IRS guidelines. While determining what constitutes achievement awards eligible to be given tax-free can be tricky, gifts given without explicit performance ties likely count as taxable compensation. With this key understanding of what employee awards are deemed tax-free versus taxable income, we set out gift shopping armed with the knowledge to stay IRS compliant while generously celebrating our hardworking team.

When considering holiday gifts to give an employee, our company carefully reviewed the potential tax consequences. We wanted to spread some extra holiday cheer with thoughtful gifting, but Uncle Sam also wanted his share of anything that could count as gross income. The last thing we desired was burdening staff with additional tax reporting requirements or reducing the value of the gifts.

We started researching rules around gifts to employees, awards to employees, gift certificates, and gift cards. Although the IRS allows gifts under $25 to generally not trigger gross income requirements, awards, and bonuses would still need to be reported. Additionally, any gift card or gift certificate would count the full face value towards gross income, regardless of the actual amount spent.

Armed with this knowledge around tax rules for gifts to employees, we planned an epic party filled with awards recognizing achievements and milestones while keeping individual gifts under $25 value to avoid tax implications. By focusing more on recognition and experiences rather than high-value personal gifts, we spread holiday cheer across the team without triggering extra tax consequences or gift reporting to the IRS. Moving forward, we’re better equipped to give gifts to employees in a compliant, thoughtful way.

Employee Gifts Tax Deductible

When it comes to giving corporate gifts to an employee, cost makes a huge difference in how people perceive their value to the company. Opting for the cheapest option per person ultimately sends the message, “We care more about our bank account than your effort.”

We have never been in that business, and we didn’t mind taking a loss during the holidays if it meant our dedicated teams were able to receive gifts that truly captured how valuable they were to us.

That isn’t to say we went to ridiculous extremes, but we weren’t afraid to go the extra mile if it meant leaving a great impression and boosting company morale.

As we looked into answering, “Are employee gifts tax deductible?” we found that yes, you can write off up to $25 per person each year. So, not a lot.

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That wasn’t so bad. We were happy to find that you can deduct holiday party expenses, so long as the party isn’t over-the-top extravagant. It should have food and beverages, but you won’t be able to write off anything lavish, like renting out a ballroom at a 5-star hotel and having a 4-course catered meal.

Entertainment is also not deductible, so we had to make sure whatever we chose was worth the expense. 

Are gifts tax deductible?

Not cash gifts to employees over $25. 

Speaking of which, cash gifts were what we specifically wanted to learn more about. Holiday bonuses that were worth thousands would be classified as income, meaning they were employee gifts taxable by the IRS.

We wanted to avoid that, so we started looking into corporate gifting ideas instead. HR pointed us to SwagMagic, and we were instantly impressed with their catalog. We also loved their print-on-demand feature, which would let employees customize their own gifts, pick what they loved, and spare the company from having to pay for tons of merchandise in bulk.

There was also the option to craft curated boxes. Which would be perfect for special events, birthdays, and congratulatory gifts when people get a promotion.

Are gift cards to employees tax deductible? 

As we investigated options for future employee gifting events, we closely reviewed IRS guidelines to understand what gifts must be reported as taxable income to employees. Since cash gifts are considered taxable wages, we wondered if gift cards would also count as income to the employee.

According to the tax codes, gift cards and certificates that can be exchanged for general merchandise are treated the same as cash gifts for tax purposes. Essentially, any item with a definable cash value given by an employer to an employee counts as taxable income on which payroll taxes must be withheld. While businesses can deduct the full face value of gift card purchases as expenses, the same total must be treated as taxable gifts and included on employees’ taxable income reporting.

With this clear understanding of reporting rules for gifts given to staff, we can craft future employee recognition programs and holiday gifts that align with IRS regulations. Although bonus wages and merchandise cards come with tax implications, creative awards events and nominal personal gifts under $25 can still boost morale without triggering additional taxable income for employees. We aim to structure gifting in line with these standards moving forward.

De Minimis Tax Rule

Were there any gifts to employees that wouldn’t cost them taxes? And what gift amount can you deduct as a business expense? Overall, are business gifts tax deductible?

To answer this question, we had to learn a lot about what the IRS calls de minimis fringe benefits. These are benefits that aren’t frequent. They’re so small that the government considers their value negligent and not liable to taxation.

The maximum amount of a de minimis gift is $25. This cannot be a gift card, gift certificate, or any currency that can be exchanged for real money. 

Interestingly, the IRS de minimis tax rule differentiates between gift certificates with a cash value and ones that employees can redeem for a special item of personal property. In that case, as long as the item is of low value and only offered infrequently (such as birthdays and holidays), it can be excluded from taxes. 

Ultimately, the de minimis tax allowance excludes any gifts that are valued over $100. So, even if you’re buying swag or making gift baskets for your team, they could be subject to taxation. This depends on how much they’re worth.

How to Avoid Gifting Tax while Giving Gifts to Employees

Our company was fine not being able to write off every gift. But we wanted to give non-taxable gifts to employees that wouldn’t up their financial burden come tax time. We ultimately settled on ordering some SwagMagic merchandise that was valued under $75 each. We gifted these directly to employees, so they wouldn’t have to worry about having to be taxed in exchange.     

Although it took a lot to learn, we were happy we took the time to cover all our bases. Our newfound understanding of IRS employee gifting rules would make it easier to choose the best gift options in the future.