Understanding the Tax Implications of Employee End of Year Gifts

The holiday season is approaching quickly and unless you’re planning to follow in the footsteps of Ebenezer Scrooge, you’ve likely begun planning holiday gifts for your employees. As a small business owner it's important to understand tax rules around employee gifts so that you aren’t surprised come tax day.

Turkeys, Hams, & Other Tangible Gifts

Handing out turkeys or a honey ham before Thanksgiving has become a much loved tradition at many offices. As an employer, you can deduct the cost of those turkeys, hams, or other tangible gifts as long as the value doesn’t exceed $25 per employee per year. This is important to note when planning end of year gifts. If your organization is in the habit of giving away during November and December, you’ll need to keep the total below $25 per employee or your employee will need to report the gifts as part of their year-end taxes. 

Gift Cards Of Any Amount 

Gift cards seem like an easy solution. They’re easier to buy in bulk, don’t require cold storage, and ensure even those who don’t eat meat are happy with the gift. However, the IRS does not provide clear guidance on whether gift cards are subject to taxes. There is some debate as to whether gift cards under $25 are considered ‘de minimis’ fringe benefits, meaning they are a small amount, and not subject to taxes but the IRS has yet to provide a definitive answer. If you are planning to give gift cards or gift certificates you may need to withhold taxes from employee’s pay for the gift amount. In this scenario it is best to contact your accountant to discuss the best option for your business.

A Note About Taxable Gifts

If you are feeling extra generous this year and want to reward your team with a gift exceeding $25, you will need to deduct all applicable federal, state, and local income and FICA taxes, as well as pay any employment taxes on the gifted amount. 

You can read more about the IRS gift regulations for employers in Publication 463 (https://www.irs.gov/publications/p463#en_US_2018_publink100033906). However, if you are planning to give your employees a gift this holiday season I strongly recommend reaching out to your accountant to discuss your ideas and the tax implications. As always, I am happy to help answer any questions you may have. Please feel free to contact me at any time. 

Happy Holidays, 

Karen