QUESTION: As the holidays are approaching, we are looking for ideas for employee gifts. If we give gift cards or gift certificates, will they be taxable to the employee? What about hams and turkeys?
Anything that equates to giving cash must be considered taxable income for the employee. This includes gift cards, gift certificates (even if they cannot be redeemed for cash and can only be used to purchase certain items), and bonus checks. The value of all of these must be included in the employee’s income and is subject to employment taxes.
However, if the employer buys a gift that is not equivalent to cash and gives it to the employee, it is not included in the employee’s income. An example would be if the employer buys $20 boxes of Godiva chocolates and gives them as gifts to the employees. However, if the employer gives Godiva gift certificates to employees, it has to be included as part of the employee’s income. If the employer buys turkeys or hams and distributes them to the employees, it is not considered taxable income. However, if the employer gives a gift certificate for a turkey or ham to the employee, it must be counted as income, and is, therefore, taxable.
Items such as turkeys, hams, chocolates and some entertainment tickets are considered “de minimis” benefits, which are defined as “any property or service you provide to an employee that has so little value that accounting for it would be unreasonable or administratively impracticable” (IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits, 2015). These gifts must have a low market value and be given infrequently; otherwise, the IRS may question the practice.
The IRS has determined that, if an organization pays its employees a specified percentage of their monthly salary as a holiday gift, the gift is paid as a result of the employment relationship and is, therefore, taxable. It is immaterial that the gift is not paid pursuant to work quality, quantity, or tenure. In view of this, a common practice among employers is to “gross up” cash gifts so that the employee gets the full value of the gift. “Grossing up” is a procedure to calculate the gross payment that the employee must receive when the employer pays the employee’s taxes.
Source: The Employers Association