Taxability of Year End Gifts

Its Christmas season, your employees have worked hard all year and you want to give them something to say thank you.  Great idea; there are some rules to follow so that both you and your employees get the best tax treatment.  If the rules are followed correctly this is a win/win.

Gifts to employees that qualify as de minimis fringe benefits are deductible by the employer and excludable from the employee’s wages for purposes of both income and social security taxes.  De minimis fringe benefit are gifts of property or service that are offered infrequently and have a value so small that it is impractical and unreasonable to account for them.  Examples specifically listed in the IRS regulations are:

  • Birthday or holiday gifts with a low fair market value
  • Occasional cocktail parties, group meals or picnics for employees and their guests
  • Occasional theater or sporting event tickets (not season-tickets)
  • Coffee and doughnuts
  • Flowers, fruits, books, or similar property provided under special circumstances such and illness, family crisis or outstanding performance

The IRS does not provide a definition of “low fair market value”, however a couple of IRS documents reference amounts of $100 and $109 as too high to be considered de minimis.  Both documents were from the year 2000 and prices of most items have risen significantly since then.  Even so, If you want to be on the safe side we recommend keeping the gifts under $100 per employee.

Very Important – the de minimis rule exception applies only to gifts of property or service.  Gifts of cash or gift certificates do not qualify for this exception and would be considered taxable compensation to the employee.  In one example the IRS declared that an employer could give employees hams, turkeys, or gift baskets as a holiday gift, but if they switched to giving gift cards to a grocery store for the same amount of value the gift would be taxable.

The take away; for the best tax benefits keep holiday gifts to employees at a reasonable amount and stay way from using any form of cash, gift certificates, or debit cards.

 

-David Knittel, Director of Tax, PracticeCFO

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