Tax Consequences of Employee Holiday Gifts

Article Highlights:

• De Minimis Fringe Benefits
• Cash Gifts
• Gift Certificates and Debit Cards
• Non-cash Vouchers
• Group Meals
• Tax Compliance and Planning

Employers frequently send gifts to their employees at this time of year.  When a present is infrequently given and has a fair market worth so low that accounting for it is impracticable and inappropriate, the value is considered a de minimis fringe benefit.  As so, it would be tax-free for the employee and tax-deductible for the company.

De Minimis Benefits - In general, a de minimis benefit is one that, given its value and frequency of provision, is so tiny that accounting for it is inappropriate or impracticable.  De minimis benefits are excluded from income under Internal Revenue Code section 132(a)(4) and include items that are not expressly excluded in other parts of the Code.  Examples of de minimis benefits include the following:

• Employees have limited access to a workplace photocopier.
• Employees receive occasional snacks, coffee, and doughnuts.
• Employees receive tickets to entertainment events on occasion.
• Employers provide holiday gifts to employees.  Employers cover lunch and transportation expenses for employees working overtime.
• Group-term life insurance for an employee's spouse or dependents with a face value of no more than $2,000.
• Employees receive special gifts, such as flowers, fruit, and books, for occasions like birthdays or illnesses.
• Personal usage of an employer-provided cell phone for business reasons.

When deciding whether a benefit is de minimis, always consider its frequency and value.  A de minimis benefit must be rare or sporadic in nature.  It must also not be a type of deceptive remuneration.

The determination of whether an item or service is de minimis is based on all relevant facts and circumstances.  Furthermore, if a benefit is too big to be considered de minimis, the entire value of the benefit is taxed to the employee, not simply the excess over a predetermined de minimis threshold.  The IRS has previously determined that products worth more than $100 cannot be considered de minimis, even in rare situations.

Holiday Gifts & Unique Considerations - While holiday presents are frequently given in the spirit of kindness, they must be carefully handled for tax purposes:

• Cash gifts, regardless of the amount, are considered supplementary earnings.  As a result, they are subject to employment and withholding taxes.  For W-2 employees, any such cash gift must be reported as W-2 income rather than on Form 1099-NEC or 1099-MISC.  Employers treat financial presents as they would regular salary.
• Employers who provide gift certificates or debit cards that may be redeemed for cash are regarded to have provided additional compensation, regardless of the amount given.
• Non-transferable gift coupons that can only be used for certain things, such as a turkey, ham, or gift basket, are not considered monetary equivalents.  As a result, the employee does not pay taxes on them.  
• Group Events: Holiday meals, parties, and picnics are considered de minimis fringe benefits.  Their worth is not considered significant enough to be included in taxable income.

Tax Compliance and Planning

Employers should carefully evaluate the tax implications of any gifts they want to distribute.  Misclassification or misunderstanding of the regulations can result in unanticipated tax liabilities.  Systematic documentation and attention to IRS requirements can assist assure compliance.

Employers that have questions about specific instances or want individualized counsel on the tax implications of holiday presents should see a tax specialist.  This cautious planning allows employers to preserve the goodwill intended by the presents while avoiding unexpected tax repercussions.  If you have any further questions or require assistance with tax issues relating to employee presents, please do not hesitate to contact our office for assistance.