To say this past year has been challenging is definitely an understatement. Employers may be thinking about rewarding hard-working employees with a gift. The tax law permits this but, as with many things, it sets some parameters.
Gifts of Cash and Cash Equivalents
Gifts of cash and cash equivalents are always taxable to the employee. Cash equivalents are items that are easily convertible to cash, such as gift certificates. These gifts are compensation to the employees and are treated like bonuses. They are subject to federal and state income tax withholding, Social Security and Medicare taxes, federal and state unemployment taxes, etc. The gift and related taxes should be reported on the employee’s W-2 for the year. The gift may be grossed up for taxes if the employer wants the employee to receive the net amount.
Example: Frannie works for ABC Co and is knocking it out of the park. To acknowledge her efforts, they give her a $100 gift card to her favorite store. The value of this gift must be included in Frannie’s wages and taxed accordingly.
Gifts of Merchandise
Gifts of non-cash items of nominal value meet the rules for tax-free de minimis fringe benefits. A gift is considered de minimis if it meets the following criteria:
- The value is nominal;
- Accounting for the item would be administratively impractical;
- The gift is provided infrequently; and
- The gift is furnished to promote health, goodwill, contentment, or efficiency of employees
A nominal value is normally considered to be $25 or less. However, if an employer calculates the value to determine taxability then it’s no longer nominal and must be included in compensation (even if it’s less than $25). This is because the underlying premise of a nontaxable de minimis gift is that accounting for the item would be administratively impractical.
Example: Company X has 76 employees working remotely during the pandemic. The CEO wants to do something nice for the company’s people and decides to send all employees a logo-branded coffee cup. Each cup costs $24.99. It is administratively impractical to calculate payroll taxes on each gift. The gift is considered de minimis and is not taxable.
Gifts of non-cash items that do not meet the four criteria above are taxable and fall under the same rules as cash gifts.
Example: The Fancy Boutique’s manager is retiring. To celebrate her 25 years of service, the owner gives her an engraved bracelet worth $250. The value of the bracelet must be included in the manager’s wages and taxed accordingly.
Gifts of merchandise by vendors may also be subject to tax. If a vendor presents a gift of merchandise to the employee of a customer, the vendor must provide the customer’s employee with a 1099 if the value of the gift exceeds $600. If a vendor presents a gift of merchandise to the customer, who then distributes that merchandise to its employees, then the value of the merchandise must be included in the employee’s wages and taxed accordingly.
Example: Superior Vendor gives Best Customer Co three fancy coolers to raffle off at an employee benefit fair. Each cooler is worth $400. Paul, Art, and Cecilia each win a cooler. Best Customer Co must include the value of the cooler in each of their wages and tax them accordingly.
Other Types of Gifts
An employer may choose to reward employees in an assortment of ways. A few examples:
De Minimis Non-Taxable:
- Occasional supper money or cab fare of nominal value
- Occasional personal use of a copy machine (cannot be more than 15% of the total usage of the machine)
- Discounted meals at an employer-operated eating facility that are provided to all employees without discrimination
- Occasional company parties or picnics
- Holiday gifts of nominal value
- Personal use of membership to a qualified athletic facility
Not De Minimis and Taxable:
- Personal use of membership at country clubs or nonqualified athletic facilities
- Season tickets to sporting or entertainment events
- Personal use of an employer-owned boat, plane, or lodge
- Discounted meals at an employer-operated eating facility that are only provided to owners, officers, or highly compensated employees
If you have questions about how to handle gifts to employees and other fringe benefits, please contact your Anderson ZurMuehlen advisor.
This post was written by Erin Stockwell, CPA and Shareholder in our Great Falls, MT office.