The holiday season is nearly here, and you might be starting to think about gift giving this year. If you’re planning on thanking your employees for their great work throughout the year with gifts, or maybe even a holiday party, there are a few tax rules you should keep in mind.
In general, all types of compensation are subject to income tax – unless excluded by the tax code.
De Minimis fringe benefits may allow employers to provide holiday gifts of property – not cash or cash equivalents – with a low fair market value, without the employee having to pay additional taxes on the gift. De Minimis (reminder found here) in simple terms refers to something too minor or small to be considered. In other words, it is something small enough it is not practical to track or administer the value and has little to no impact on the employees’ income.
The frequency and availability of these gifts can determine whether or not they are considered de minimis. As a general rule, as long as all employees are receiving the same gifts, the frequency isn’t an issue.
Some items that do qualify as de minimis fringe benefits and gifts – and are therefore excludable from income tax – include:
- Traditional holiday gifts with a low fair market value. This includes your turkeys, hams or any other small non-cash
- Occasional cocktail parties – this means your company holiday party, employee picnics, etc.
- Occasional sporting event or theater tickets.
- Occasional coffee, donuts and snacks in the office.
- Special occasion gifts, such as sympathy flowers.
Each of the above items include a time frame… occasionally. These small gifts are considered excludable as long as they are not being given on a regular or excessive basis.
Now that we know what is excludable, let’s take a look at what is considered taxable.
The larger the gift, the better the chance it is taxable compensation. For example, if you’re considering giving your employees season tickets to see their favorite football team, those tickets are considered taxable and must be reported as income.
Other examples of taxable gifts include:
- Gifting your employee a weekend away at an employee-owned facility, such as a hunting cabin or timeshare.
- Providing your employee a membership in a country club or a gym.
- Allowing your employee to use a company vehicle for commuting or other personal use more than one day a month.
Some employers provide some of these benefits throughout the year, while others may give them for the holidays. If you’re planning on giving any of these gifts, make sure you include them as income!
You might have noticed we haven’t touched on a very common gift employers give for the holidays – gift cards, gift certificates and even cash.
When it comes to gift cards, certificates and cash, the rule is pretty straightforward: no matter how large or small the amount, it will always be taxable (with a few small exceptions of course). If you’re thinking of giving your employee a $5 Target gift card or even a $500 general use gift card, you guessed it – it must be reported!
The moral of the story? Pay attention to the value of your gifts to make sure you’re in compliance. If you want to give your employees great gifts but aren’t quite sure what you should be reporting, let us know. We are here to help you and your employees have a great holiday season!