‘Tis the Season: Tax Implications of Employee Gifts

As the 2023 holiday season is upon us, everyone at Hymson Goldstein Pantiliat & Lohr is grateful for the relationships we have with you and wish you and your families the simple gifts of family, true friends and good health. May each of you be blessed with sharing this holiday season with those you love.

Many business owners use the holiday season to express their gratitude to their employees with gifts.  Of course, cash gifts and monetary bonuses will always be taxable to an employee and fully deductible as a business expense to the employer, but there are other items which may not be taxable to an employee.

Typically, an employer can take tax deductions for their gifts. However, your generosity may end up making an employee liable for declaring or paying tax for the gift. Any gift, from a bonus to a gift card, counts as income.  According to the IRS: “Cash is generally intended as a wage, and usually provides no administrative burden to account for. Cash therefore cannot be a de minimis fringe benefit.”

Yet, the IRS has established some exceptions. If the gift is occasional rather than regular and of little monetary value, it is classified as a “de minimis fringe benefit.”  These “de minimis fringe benefits” may include holiday gifts, occasional tickets for entertainment events (such as sporting events or concerts) and the like.  The IRS has ruled previously in a particular case that items with a value exceeding $100 could not be considered de minimis, even under unusual circumstances, so that amount is used as the upper guideline.   In determining whether a benefit is de minimis, you should always consider its frequency and its value. An essential element of a de minimis benefit is that it is occasional or unusual in frequency. It also must not be a form of disguised compensation.

Even though a “de minimis” gift may have a value of up to $100, the IRS limits a business tax deduction for employee gifts to $25 per item.  However, a business may be able to treat certain items and events that exceed that limit as a business entertainment expense, which has more latitude and for which the business may take a 50% deduction. Incentive gifts can also be deducted as a business expense. For example, travel or equipment awarded to your best-performing salesperson might qualify.

Alternatively, an award of less than $400 for outstanding work may also avoid taxes, but the rules for excluding monetary awards from taxable income are complicated.

Remember, IRS rules are subtle, and you should always consult a qualified tax adviser about the tax implications of any employee gift you contemplate giving.

All Rights Reserved - Copyright © 2004-2024 Hymson Goldstein Pantiliat & Lohr, PLLC
ARIZONA - 8706 E. Manzanita Drive, Suite 100 Scottsdale, AZ 85258 Phone 480-991-9077 Fax 480-443-8854
NEW YORK - 525 Chestnut Street, Suite 203 Cedarhurst, NY 11516 Phone 516-596-8366 Fax 480-443-8854