It is common practice this time of year for employers to give their employee gifts to staff. The question is then – what makes a gift taxable? Some gifts are a de minimis fringe benefit. There are two main factors that determine the taxable status of a gift:
- the gift is infrequently offered
- or that gift has a fair market value so low that it is impractical and unreasonable to account for it.
As such, it would be tax-free to the employee, and its cost would be tax deductible by the employer.
What is De Minimis Benefits?
A de minimis benefit is a gift that is so minor as to make accounting for it unreasonable or impractical. IRS Code section 132(a)(4) is the code that excludes De minimis benefits from income. These benefits include items not specifically excluded under other sections of the Code. Examples of de minimis benefits include such items as:
- Controlled, occasional employee use of a company photocopier.
- Occasional snacks, coffee, doughnuts, etc., furnished to employees.
- Occasional tickets for entertainment events given to employees.
- Holiday gifts from the employer to the employees.
- Occasional meal money or transportation expenses paid for by the employer for employees working overtime.
- Group-term life insurance on the life of an employee’s spouse or dependent with a face value not more than $2,000.
- Flowers, fruit, books, etc., provided to employees under special circumstances, such as a birthday or illness.
- Personal use of a cell phone provided by an employer primarily for business purposes.
How do I know if my employee gifts are considered de minimis?
In determining whether a benefit is de minimis, you should always consider its frequency and 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.
Whether an item or service is de minimis depends on all the facts and circumstances. If a benefit is too large for de minimis status, the entire value of the benefit is taxable to the employee. Not just the excess over a designated de minimis amount. The IRS has ruled previously that items with a value exceeding $100 cannot be considered de minimis, even under unusual circumstances.
Are holiday employee gifts taxable?
Cash gifts
Cash gifts, regardless of the amount, are considered ‘additional wages’. And wages are always subject to employment taxes (FICA) and withholding taxes. Caution: If the gift recipient is a W-2 employee, the employer may not issue them a Form 1099-NEC or a 1099-MISC for a gift of cash. One must treat the gift amount as W-2 income.
Gift Certificates
Gift certificates are considered ‘additional wages’ regardless of the amount. This specifically is referring to debit cards, gift cards, or similar items that are convertible to cash. However, this is not the case if the gift is a nontransferable coupon that can only be redeemed at a specific establishment. A nontransferable coupon is not a cash equivalent. For example, a coupon that can be redeemed for a turkey, or a gift basket at a local store could not be converted to cash; therefore, would not be considered ‘additional wages’.
Employees events – like holiday group meals or cocktail parties – are treated as de minimis fringe benefits.
If you have questions about the tax treatment of holiday gifts to employees, please give this office a call at 360-778-2901.
Inheritance Taxes Explained – IRS Releases Inflation Adjustments For 2021
