‘Tis the season for tax-savvy employee gifting
Year-end gifts are a fun and traditional way to thank employees for their hard work. But before you start dashing off checks or buying gift cards, make sure the IRS won’t put a damper on the good cheer.
THE TAXMAN GRINCH-ETH
The taxability of employee gifts depends on their value and the type of gift. For example, all cash or gift cards redeemable for cash are taxable to the employee. On the other hand, noncash gifts of minimal value, such as a holiday turkey or a nice paint brush, fall under the IRS’ de minimis rule and are not taxable—unless they exceed $100; then they are usually viewed as compensation by the IRS. And to be clear, if a gift exceeds the de minimis amount, the entire value of the gift is taxable to the employee, not just the amount over de minimis.
If you are the employer bestowing generous gifts, you must withhold extra taxes from the employee’s cash pay to make up for any property given in kind. You may also wish to educate your employees about the implications of the gift they are receiving and the need to declare the gift as part of their income.
GIFT GENEROUSLY WITH FEWER CONSEQUENCES
Want to bestow something meaningful without gumming up the gears with tax implications? Consider time off. There are a couple of ways to go about it:
Time off without pay: This approach has zero tax consequences for the employer and employee. While it may not sound like much of a gift, for many individuals trying to juggle the holidays and the general mayhem that can be life, the provided break can be much appreciated.
Time off with pay: For salaried and hourly employees, the tax consequence for time off with pay is the same as if they had worked the time. The pay is reportable and taxable. However, your employee walks away with money in pocket—and the day off, too. That’s always appreciated.
Many contractors like to give gifts to valued customers during the holidays. If you’re one of them, be aware that the IRS is less generous about giving you a break on these acts of kindness. The IRS limits how much a business can deduct to $25 in gifts per person per year. Note that this limit applies whether the gift is given directly to an individual customer or indirectly to the company they work for (say a real estate agency), but is intended for a specific individual.
On the bright side, gift wrapping, engraving, mailing and insuring do NOT count against the $25 limit.
However, if you’re gifting another business, there is no limitation on value as long as the gift is for business use. An example might be a painting business giving a subcontracting company a set of tools intended for use in the subcontracting business’ operations.