We want to give you a better experience, where you feel connected to your financial journey and confident that you’re making the best decisions for your business. As part of this, we’ll feature blog posts on frequently asked questions. No question is a dumb question so if you want to learn more about something, just ASK.
It’s the holiday season and businesses and individuals alike are honoring individuals they care about. One of the common ways they do this is with gift cards. So if your organization gives gift cards, there are steps you have to follow to make sure you’re compliant. Yes, shocking to no one, there are IRS rules about even this …
You gave your employees each a gift card for Christmas. Did you report it as income? You should have. Yes, even gift cards count as taxable income and must be reported on your handy W-2 (remember that one?). According to the IRS, because cash and cash equivalent fringe benefits, like gift certificates, have a readily ascertainable value, they do not constitute de minimis fringe benefits.
De mini … what?
A de minimis fringe benefit is “one for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical.” In other words, this benefit is so small the IRS basically says, don’t even bother with trying to report it.
Let me guess, gift cards don’t qualify.
You guessed it. Cash or cash equivalent items provided by an employer are never excludable from income (with a few minor exceptions … did you expect any different?). Gift certificates have an easily ascertainable value and can be redeemed for general merchandise or have a cash equivalent value. In other words, you have to report them as part of an employee’s wages.
So I have to report them.
Yes, you have to include it as part of wages on Form W-2. Further, if the employee is covered for social security and Medicare, the value of benefits are also subject to withholding for these taxes.
Any way around this?
Awards and gifts of minimal value (read, not a gift card … think more like a holiday turkey), generally fall under the de minimis rule and are not taxable. So what’s considered minimal? Well, the IRS has never put a dollar amount on the de minimis fringe benefit. However, they have given us some examples:
- Occasional personal use of an employer’s copying machine (as long as you have restrictions in place so 85% of the use is for business purposes)
- Occasional group meals, picnics or cocktail parties for employees and their guest.
- Occasional theater or sporting event tickets.
- Flowers, fruit, books, or similar property for employees under special circumstances (otherwise known as occasionally. For instance on account of illness, outstanding performance, etc.)
Sense a pattern in the above examples? Frequency is a huge deal when it comes to de minimis fringe benefits and what does and does not need to be reported. If you have a questions, or a sneaking suspicion, check with your tax professionals.
The moral of the story.
If you give your employees a gift card, regardless of size (yes, even a $5 one counts), you need to report it as part of their wages.