Companies often show their appreciation for their employees’ hard work throughout the year by presenting them with small holiday gifts. Turkeys, hams, flowers, cookies, debit cards, gift cards and cash are some examples of gifts offered by employers. The type of gift given, however, can have tax consequences for your company and your employees.
Generally, gifts given by employers to employees are subject to income, Social Security, Medicare and federal unemployment taxes, unless the gift is considered a de minimis fringe benefit. A de minimis fringe benefit is any property or service you provide to an employee that has so little value (taking into account how frequently you provide similar benefits to your employees) that accounting for it would be unreasonable or administratively impracticable. In determining whether a particular gift would be considered a de minimis fringe benefit you need to consider three factors: (1) the value of the gift, (2) the frequency of distribution, and (3) the difficulty in accounting for the gift.
Turkeys, hams, flowers or cookies are of little value, usually given infrequently and accounting for them is administratively difficult. Such gifts, therefore, are usually considered a de minimis fringe benefit and are exempt from taxation. Though “little value” is not defined anywhere, we generally recommend that employers not exceed $25 in the value of the gift given due to the IRS’ position that businesses are permitted to deduct up to $25 for gifts they give to their customers or clients.
Debit cards, gift cards or cash, on the other hand, have a readily ascertainable value and accounting for them is relatively easy. Such gifts, therefore, will not be considered a de minimis fringe benefit and will be taxable, no matter the amount. This is true even if the employee uses the gift or debit card to purchase an item that would be considered a de minimis fringe benefit had the employer provided it directly to the employee.
So remember this holiday season that, depending on the type of gift provided, there could be tax issues in the spring for both your company and your employees.