Employer gifts may not be part of your "benefit" plans per se, but the IRS does have rules about fringe benefits. IRS Publication 15-B provides employers with a good explanation for how to handle taxation of fringe benefits generally. But what about year-end "gifts?" How are they treated?
Since it is year-end, it is not uncommon for employer to provide "gifts" to employees for a job well done, or for sticking through another tough year. Either way, employers should remember that gift giving has its limits and the IRS is watching. The IRS regards some gifts as taxable income for the recipient. Clearly there is a distinction between whether a gift is given from an individual or from an "employer." The IRS is more concerned with the latter, so let's consider some of the options.
The IRS considers any cash given from an employer to an employee as compensation. If an employer gives an employee cash and the cash comes fro the company (not a personal gift from, say, attorney to legal assistant), it must be treated as compensation and reported for tax purposes. Gift cards are the same as cash. They are subject to FICA the same way that any other pay would be treated. However, the IRS does not consider small non-cash gifts to employees as taxable compensation. The IRS (on its website for "de-minimus fringe benefits") provides that holiday gifts, as well as things like flowers, fruit and books are not subject to taxation. But any gift that has a value in excess of $100 is outside of this exception so an employer must report the value of the gift on W-2s and do appropriate withholdings.
Note: cash gifts, gift certificate and gift cards, regardless of the size, are taxable. There is no de-minimus exception for cash and cash equivalents.
So cash is taxable, gift card and gift certificates are taxable, small gifts are probably not, but what about the holiday party? The good news is that the IRS does not consider a company paid holiday party to be a form of taxable compensation provided they are "reasonable." A year-end trip to the Bahamas might be hard to justify, but dinner at the local steak joint is not going to be an issue. If you are going to give "gifts" to employees during the holidays, make sure you know the rules and treat them correctly.
And as a side note for employers that have collective bargaining agreements, make sure to check the restrictions in that agreement before giving gifts. If you give a gift that is taxable as compensation by the IRS, it might be treated as compensation for which contributions are due to benefit plans covering the union employees. Many disputes have arisen over whether to treat "gifts" as "compensation" for contribution purposes so make sure you know what you are getting in to before giving those gifts.
