Are Gifts to Employees Subject to Tax Penalties?

Rewarding employees for their hard work and dedication during challenging seasons is something that has come up frequently over the course of the pandemic.  Rewards are a wonderful option, but care should be taken to avert any unintended penalties.

The go-to for most employers is Cash or Cash Equivalents.  Handing an employee $50 in cash or a $50 gift card is a nice gesture, but unfortunately, both are considered taxable income.  Therefore, your employee would need to be taxed on the value through payroll.

So, how can we show our appreciation to employees without incurring a penalty? 

According to IRS Publication 15-B “A De Minimis benefit is any property or service you provide to an employee that has so little value…that accounting for it would be unreasonable or administratively impracticable”.  Publication 15-B goes on to explain “Cash and cash equivalent fringe benefits (for example, gift certificates, gift cards, and the use of a charge card or credit card), no matter how little, are never excludable as a De Minimis benefit”. 

What does that mean?  De Minimis benefits are strictly regulated, but the two main take-a-ways are:

  • No cash or cash equivalents
  • The value must be nominal so accounting would be unreasonable or administratively impracticable.
    • Example: taxing your employee for a doughnut or coffee.

To show appreciation, employers may consider the following as defined in Publication 15-B:

  • Holiday or birthday gifts, other than cash, with a low fair market value.
  • Occasional tickets for theater or sporting events.
  • Occasional parties or picnics for employees and their guests.
  • Meals occasionally provided to employees: (Meals to promote goodwill or to boost morale are not normally tax-exempt unless the value meets the definition of De Minimis)
    • Coffee, doughnuts, or soft drinks
    • Occasional meal provided to enable an employee to work overtime.

Cash and Cash Equivalents are valuable employee incentives.  Feel free to utilize them to reward your employees, but remember to include them in earnings and withhold appropriate payroll taxes when doing so.  Consider the impact of Federal (FIT) and State (SIT) withholdings, and consider grossing up the incentive amount to cover the employee Social Security and Medicare withholding.  Be sure to follow the IRS rules for withholding on supplemental wages.  In addition, communicate to your employees if a “gift” is taxable so they are not surprised when they receive their paycheck.

For further assistance in handling employee gifts, please contact the Anderson ZurMuehlen HR Consulting Team.

This article was written by Heather Rankin, HR Specialist in the Anderson ZurMuehlen Corporate office.

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