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Beware of the IRS Scrooge During the Holiday Season

Dec 14, 2023 | Phillip J. Addis

In the spirit of holiday festivities, many employers embrace the tradition of giving gifts to their employees during holiday parties or as tokens of appreciation. While employees certainly appreciate the gesture, it is even more appreciated by the IRS and assorted state agencies.

Will the IRS want taxes for my gifts? - Most Certainly.

According to the U.S Infernal (sorry Internal) Revenue Service (IRS), most gifts given by employers to employees are considered as additional wages and are taxable, regardless of the form they take – cash, gift cards, or tangible goods (IRS, 2021). This is an important premise to start with, as it lays the foundation for understanding the tax implications surrounding gifts received at an employer-sponsored holiday party.

Given the small value, many companies do not view this as income or wages. In legal and accounting circles that is referred to as De Minimis. The IRS does have an exception for these items called the De Minimis Benefits Rule, which may exclude certain gifts of minimal value from being considered as taxable income.

For the IRS, size does not matter.

According to the IRS, gift cards are cash equivalents. This means that they are usually treated as taxable income to the employees who receive them. According to the IRS Publication 15-B (Employer’s Tax Guide to Fringe Benefits), gift cards that can readily be converted to cash are to be treated as wages, paid as cash payments and are subject to federal income tax withholding, Social Security, and Medicare.

The IRS does not specify a dollar amount for what constitutes a “minimal value.” In one case, the IRS pursued a company for taxes on $10.00 gift cards. The simplest rule to follow is if you can determine the value, it is taxable. This means any type of gift card, gift certificate or voucher, even given as a prize to employees would be taxable.

What about gifts of Food?

During the holidays, it is common for employers to reward their employees with gift cards to purchase a turkey, ham, or some other food items for a holiday dinner.

In the “olden” days, companies used to distribute turkeys or hams, but no more. Not surprising, this tradition generated assorted legal claims:

Religious discrimination (Giving a ham violates certain religious beliefs against eating pork.)

Racial discrimination (Thanksgiving stands for the genocide of native peoples.)

Workplace Harassment (An employee who was a vegan felt harassed when asked if they would like a ham or a turkey.); and

Personal Injury (A family member of the employee choked on a turkey bone and sued the employer who provided the turkey.)

Not to be outdone by lawyers, the IRS has ruled that those gift cards for food are wages and are subject to national, state and (in some cases) municipal taxes, plus withholding for Social Security and Medicare.

A Safe Bet for Employers.

Companies should treat their employees well every day of the year. If you decide at any time of the year to give gift cards or similar items as rewards, incentives, or door prizes, remember that they are most likely taxable as wages.

Considering the ruling from both the IRS and most state agencies, it is prudent for employers to withhold taxes when providing gift cards or similar items as rewards, incentives, or door prizes, to employees.

To stay on the safe side of compliance, employers might consider grossing up the value of the gift card to cover the withholding tax, ensuring that the employee receives the full value of the gift.

Rather than letting the IRS “cook your goose” this holiday season, make sure you report those gift cards to Uncle Sam.

This article is being provided to you for informational purposes only. It is not intended to provide legal or tax advice. Please check with your tax advisors to be certain what options work best for you.