Ask the taxgirl: Gifts in the Workplace

Taxpayer asks:

I own a small business. I was planning on getting my employees a little something for Christmas this year but I heard on TV that they’d be taxed on it. Is that true?

taxgirl says:

It depends.

You see, the IRS tends to believe that, even at the holidays, you aren’t really giving a gift to your employees, no matter how much you like them. The IRS characterizes most gifts from employer to employees as compensation (though not the other way around, hint, hint). That means that the amount of gift or bonus must be included in the employee’s income for tax purposes and employers must withhold the proper amounts for income tax, Social Security and Medicare. This is always the case for cash and cash-equivalent gifts (that includes gift cards and gift certificates). There are some exceptions, however, for non-cash gifts.

Turkeys, the ubiquitous fruit basket and small electronics may be considered de minimis (Latin meaning “of minimal value”) and therefore not considered taxable. The IRS doesn’t place a specific value limit on gifts but rather exempts those holiday gifts which are “so small as to make accounting for it unreasonable or impractical.” In the IRS Fringe Benefits Guide, they use the term “low FMV.” I know that many employers use $50 per gift as a guideline since that’s the ethics limit for gifts in many municipal workplaces; again, that isn’t a dollar value sanctioned by IRS (there is none) but a common guideline.

If you make non-cash gifts which are clearly not de minimis, such as a trip or expensive electronic (like an iPad), you must report the value of the gift as taxable income to the employee.

But don’t let the IRS play Grinch:

So, give gifts if you want, just be aware of the consequences.

Or consider a nontaxable perk for your employees. The IRS allows you to throw a firm holiday party with no tax consequences to the employees. Take your employees out for dinner or host a nice spread at the office (we’re partial to hoagies and beer – after all, it *is* Philly). Reasonable holiday parties are not considered taxable to the employee and, unlike other business lunches and dinners, you don’t have to “talk business” at any time in order to make it deductible to you.

You can also give employees a day off (or two) for the holidays – some offices even close for the week between Christmas and New Year’s (ours does). Hourly employees who are not compensated for days off may appreciate the time off and there are no tax consequences to the employer or employee. If you compensate an employee for the time off (or are required to do so by law or the terms of employment), the tax consequence to the employer and the employee is the same as if the employee had put in a normal work day, so no harm, no foul. For salaried employees, there is likely no tax consequences for allowing an extra day off but check your employee handbook to be sure.

No matter how you choose to celebrate, enjoy your holidays!

Like any good lawyer, I need to add a disclaimer: unfortunately, it is impossible to offer comprehensive tax info over the internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.

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