Are Gift Cards Taxable to Employees?

During the holiday season, a gift can be a great way for both businesses and individuals to show appreciation. But do you know whether those gifts are taxable? The question of whether gifts are taxable should be asked on a case-by-case basis. And if your organization gives gift cards, you need to know the answer to one important question: are gift cards taxable to employees?

Giving gifts to your employees is a nice gesture, but it’s important to make sure you’re reporting them correctly, or you could end up with 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. It’s also important to note that IRS rules on gift cards to employees are not covered under de minimis fringe benefit rules.

What to Know About De Minimis Fringe Benefits

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.

Yet, it can be hard to determine what exactly is considered minimal since the IRS has never put a specific dollar amount on the de minimis fringe benefit. The good news is the IRS has provided have provided some helpful guidelines.

Common de minimis fringe benefits include:

• Traditional birthday or holiday gifts of property (not cash) with a low fair market value
• 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 given occasionally under special circumstances (ex. on account of illness, outstanding work performance, etc.)

Based on the IRS rules, frequency is a significant determining factor for de minimis fringe benefits. And in general, employee gifts and awards of minimal value (like a holiday turkey, for example) typically fall under the de minimis rule and are not taxable.

Giving Gift Cards to Your Employees

Unfortunately, gift cards are another story. You might think you can give your employees a gift card or certificate for under $25 without any tax issue, but gift cards given to employees in any amount count as taxable income and must be reported on Form W-2. According to the IRS’s gift card tax rules, since cash and cash-equivalent fringe benefits like gift cards and certificates have a readily ascertainable value, they do not constitute de minimis fringe benefits.

This means that you 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.

Gift Card Tax Rules: Frequently Asked Questions

When it comes to gift cards, 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.

Here are some common questions we get about gift card tax rules:

How much of a gift card is tax free?

None. 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?

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 could 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 an experienced tax professional to avoid any potential penalties or issues.

Ensure Proper Reporting When Giving Gifts to Employees

Giving gifts is a great way to express appreciation during the holiday season. While giving gifts to employees is a thoughtful gesture, it's crucial to ensure proper reporting to avoid potential IRS notices and penalties. The taxability of gifts should be assessed on a case-by-case basis.

A trusted advisor can be a helpful resource when giving gifts to employees. Eide Bailly’s experienced certified public accountants and business advisors can provide you with the support you need to ensure proper reporting and ultimately simplify the year-end planning process.