Are Gifts to Employees Taxable?

The holiday season will be here before we know it, and that means many organizations have already starting planning for end-of-year bonuses and gifts to employees. Depending on the size and type of gift or bonus, such expenses may be taxable income for the employee, and the value will need to be included in wages on the employee’s Form W-2.

 

Gifts excluded from taxable income are referred to as a “de minimis fringe benefit,” which is a gift so small that accounting for it would be unreasonable or impractical considering the value and the frequency with which it is provided. The IRS lists examples of “de minimis fringe benefits” as:

 

  • Controlled, occasional personal use of a photocopier
  • Occasional snacks, coffee, doughnuts, etc.
  • Occasional tickets for entertainment events
  • Holiday gifts (does not include cash equivalents)
  • Occasional meal money or transportation expense for working overtime
  • Group-term life insurance for employee spouses or dependents with face value not exceeding $2,000
  • Flowers, fruits, books, etc., provided under special circumstances
  • Personal use of a cell phone provided by an employer primarily for business purposes

 

The word “occasional” is used frequently in the examples above because the gifts must be unusual in frequency in order to be deemed “de minimis.” Also, the value must not be too large.

 

But what is defined as “too large?”

 

Unfortunately, the IRS has refused to set a dollar amount that determines what “de minimis” is or is not, however, they did rule that items valued at $100 or more cannot be excluded from taxable income and are therefore not “de minimis.”

 

Cash and cash equivalents, such as gift cards or bonuses, are never “de minimis,” no matter the amount, and must be added to an employee’s taxable wages. For example, should an employer decide to gift an employee with a turkey for Thanksgiving, the gift would be “de minimis” and, therefore, not taxable because the gift is infrequent and valued at less than $100. But if the employer gave a gift card to a grocery store for the employee to purchase a turkey, the value of the gift card would be taxable because it is a cash equivalent.

 

For more information, please refer to IRS Publication 5137, Fringe Benefit Guide, or contact the experts at SST for additional assistance.

Special thanks to SST Manager of Client Accounting and Advisory Services Simeon May, CPA, CCA, CAE, for providing the content for this post. Click here to learn more about Simeon.