It’s the holiday season, and employers are already out shopping for the perfect gift for their staff. A gift card (or e-gift card) can be a great way for both businesses and individuals to show appreciation. However, if your organization gives gift cards to staff, you need to know the answer to one important question: are gift cards taxable to employees?
Are Gift Cards to Employees Taxable?
Employers could give employees a cash gift like a certification or gift card for under $25 without any kind of tax issue in the past, but now gift cards given to employees count as taxable income and must be reported on Form W-2. However, people often incorrectly assume that IRS rules on gift cards to employees are also covered under de minimis fringe benefit rules.
What Are De Minimis Fringe Benefits?
A de minimis fringe benefit is defined as “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, a de minimis fringe benefit is something so minor that the IRS is not concerned about reporting a monetary value for it. As a result, an employee pays zero state or federal income tax for the de minimis benefits.
Unfortunately, gift cards are another story. According to the IRS’s gift card tax rules, since cash and cash-equivalent fringe benefits like gift certificates have a readily-ascertainable value, they do not constitute de minimis fringe benefits. This means that businesses must report the cash value of gift cards as part of an employee’s wages on Form W-2. Furthermore, if the employee is covered for Social Security and Medicare Tax, the value of benefits is also subject to withholding for these taxes in the same way regular wages are taxed.
Want to learn more about how to correctly fill out your W-2s?
How Are Non-Taxable Gifts Determined?
Now, it’s also incorrect to assume that all gift cards won’t fall under the de minimis rule. The question of “are gift cards taxable?” should be asked on a case-by-case basis.
In general, employee gifts and awards of minimal value (like a holiday turkey, for example) generally fall under the de minimis rule and are not taxable. It can be hard to determine what exactly is considered minimal, though, since the IRS has never put a specific dollar amount on the de minimis fringe benefit. However, they have provided some examples. Commonly encountered fringe benefits include:
- Occasional personal use of an employer’s copying machine in the office (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 items for employees receive under special circumstances (otherwise known as occasionally. For instance, on account of illness, outstanding work performance, etc.)
The common thread in the above examples is frequency. Frequency is a huge deal when it comes to de minimis fringe benefits and what does and does not need to be reported. When it comes to gift cards, however, the requirements are clear: regardless of frequency or the amount of money you paid, gift cards must be reported as part of your employees’ wages. For additional resources on fringe benefits rules and exclusions, see IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits.
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Reporting: The Gift that Keeps on Giving
Giving gifts to your employees is a nice gesture, but it’s important to make sure you’re reporting them correctly, or you could wind up with a result worse than a lump of coal: an IRS notice and penalty. Understanding what is and isn’t taxable income is vital to your organization’s success, both at year-end and beyond.
Gift Card Tax Rules: Frequently Asked Questions
How Much of a Gift Card is Tax Free?
If you're wondering how much of a gift card is tax free, the answer is none. Why? Because it's not an actual 'gift'—it's a purchase. According to the IRS, gift cards given to employees are considered cash equivalent items regardless of the gift card amount. The person redeeming a gift card is essentially using your money to give themselves a present—and that's why none of it is tax free.
Can the IRS Track Gift Cards?
The answer is no, gift cards cannot be tracked by the IRS. When it comes to the IRS and gifting, reporting gift cards is done using the honor system. However, if you are not honest about the gifts you are giving, the issue may come up in an audit.
What are the De Minimis Tax Reporting Rules?
The de minimis tax reporting rules are the IRS’s way of saying that there is no need to report transactions below a certain value. These rules can change from year to year, so make sure you consult a tax professional in order to avoid any potential penalties or issues.
