Insights: Article

The Gift of Gift Cards

By   Jenni Huotari

December 12, 2017

gift card

It’s the holiday season and businesses and individuals alike are honoring individuals they care about. One of the common ways they do this is with gift cards. If your organization gives gift cards, there are steps you must follow to ensure you’re compliant. Yes—shocking to no one—there are even IRS rules about this.

So you gave your employees each a gift card for Christmas. Did you report it as income? You should have. Even gift cards count as taxable income and must be reported on your handy W-2 (remember that one?). According to the IRS, because cash and cash-equivalent fringe benefits, like gift certificates, have a readily-ascertainable value, they do not constitute de minimis fringe benefits.

De Mini … What?

A de minimis fringe benefit is “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, this benefit is so small the IRS basically says, “Don’t even bother trying to report it.”

Unfortunately, gift cards don’t qualify. In other words, you have to report them as part of an employee’s wages on the Form W-2. Furthermore, if the employee is covered for Social Security and Medicare, the value of benefits are also subject to withholding for these taxes.

Non-taxable Gifts

Awards and gifts of minimal value (think: more like a holiday turkey) generally fall under the de minimis rule and are not taxable. So what’s considered minimal? Well, the IRS has never put a dollar amount on the de minimis fringe benefit. However, they have given us some examples:

  • Occasional personal use of an employer’s copying machine (as long as you have restrictions in place so 85 percent 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 property for employees under special circumstances (otherwise known as occasionally. For instance, on account of illness, outstanding performance, etc.)

Sense a pattern in the above examples? Frequency is a huge deal when it comes to de minimis fringe benefits and what does and does not need to be reported. The moral of the story is: if you give your employees a gift card—regardless of size (yes, even a $5 one counts)—you need to report it as part of their wages.

If you have any questions—or a sneaking suspicion—check with your Eide Bailly tax professional to ensure you’re compliant on gifts even as seemingly small as gift cards.