General Rules for Employee & Customer Gift Taxation

General Rules for Employee & Customer Gift Taxation

The holidays are fast approaching, so it’s the perfect time to review the tax rules involving giving gifts to employees. Generally speaking, the taxability of employee gifts depends on the value and type of the award. For instance, if you give an employee an all-expense-paid trip, then yes, it will be taxed as income. However, a holiday turkey or a $25 gift card will not. What gets tricky are awards programs that can be redeemed for merchandise or gift certificates, because those may or may not be taxed.

General Rules for Employee Gift Taxation

Federal and state income tax withholding, unemployment tax and FICA taxes apply to monetary prizes, awards, bonuses and gift certificates. Taxable income also applies to prizes, bonuses and awards that involve goods and services.

Length-of-service awards or safety awards that are “Tangible Personal Property” are not taxable, as long as certain rules are followed. “Tangible Personal Property” does not include cash or gift certificates. However length-of-service awards given to those who have been employed for less than five years, or who have received another award within the past five years, are not tax free. Nor is an achievement award given to a manager, administrator or clerical employee tax free. A business can deduct up to $400 for these types of awards. Most tax advisors suggest reviewing the IRS rules on this topic prior to presenting gifts.

Gifts that fall under the IRS’s “de minimis” rule are not taxable. Most tax advisors report this to include amounts between $25 and $75 to an employee during a given year.
Tax rules involving gift giving for both the employer and employee can be confusing. We suggest you talk with a tax advisor to make the best decision for you and your company.

We are here to help.  Click the link below for a no obligation consultation.