Are Gift Cards Taxable to Employees?

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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?

The truth is there are steps you must follow to ensure you’re compliant with IRS gift cards rules.

Are Gift Cards Taxable?

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.

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 gift cards 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.

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, awards and gifts 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.

Are you sick of being bogged down by reporting requirements? Give yourself the gift of more free time.

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.

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