Giving employees gift cards this holiday season is a nice idea. Just be sure you’re not falling into this tax pitfall.
Tax attorneys are finding that some employers still aren’t reporting the value of gift cards issued to workers as taxable income.
The Internal Revenue Service (IRS) is taking a hard-line stance: The value of every gift card and gift certificate given out to employees needs to be reported as taxable income — no matter the amount.
Employees have to declare any and all money, gift certificates or gift cards — anything that can be converted into cash — with their other income.
According to the IRS:
- Cash or cash equivalent items provided by the employer are never excludable from income.
- Gift certificates that are redeemable for general merchandise or have a cash equivalent value are not de minimis benefits and are taxable.
So that means even failing to include a gift card valued at just $25 in an employee’s wages runs afoul of tax law.
Granted, such discrepancies aren’t bound to spark many audits, but the threat is there. And if an employee is audited, you can bet he or she will come knocking on your door.
One way to avoid blowback from employees upset at having the value of their gift cards reduced due to taxes: Add the amount they’d have to pay in taxes to the value of their gift cards.
So if you were planning to hand out $100 gift cards — and each employee would have to pay around $25 in taxes on the value of the cards — increase the value of the cards to $125.
Some other ideas:
- Give out certificates for items of minimal value.
- Provide occasional tickets to sporting events. The value of them can be excluded from taxable income.
- Give out food items (like a holiday ham or turkey), snacks, flowers or books.
As long as a gift is given out infrequently and is “administratively impractical to account for” (and isn’t a gift card/certificate that has a cash-equivalent value), the IRS will consider it de minimis.
Info: For the IRS’ rules on de minimis fringe benefits, click here.