Whether it be for the holidays, employee anniversaries, or just to boost morale, many employers will at some point consider giving their employees gifts or creating a reward plan. While these plans or gifts are certainly smart practices in terms of improving employee satisfaction, employers should understand the various tax implications associated with these awards. One of the most common rewards comes in the form of gift cards. The following is an overview to help you understand gift cards as rewards to employees and their tax implications.
Fringe Benefits and De Minimis Fringe Benefits Definitions
Below are two important tax definitions to understand before we explore gift cards and their taxability further:
- Fringe Benefits – Fringe benefits are defined in IRS Publication 15-B as “a form of pay (including property, services, cash, or cash equivalent) in addition to stated pay for the performance of services,” which also confirms that “Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it.”
- De Minimis Fringe Benefits – The IRS defines this as a benefit “which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical,” with such examples provided as flowers and fruits, holiday gifts, occasional event tickets, and other non-items. The IRS has ruled previously in a particular case that items with a value exceeding $100 could not be considered de minimis, even under unusual circumstances.
It is important to note that gift cards are usually categorized as a cash equivalent which are always taxable as fringe benefits, but certain types of gift cards are excluded as De Minimis which we will see in the following section.
Gift Cards – Tax Considerations
The following are some of the most important tax considerations when planning to give gift cards as rewards for employees:
- Gift cards, if non-De Minimis and no matter the amount, are subject to Federal Income, Social Security, Medicare, and State Income taxes. Employers must include the value of the gift card in the employee’s wages on Form W-2 in the corresponding boxes. The total amount of fringe benefits may also be reported in box 14.
- As previously mentioned, gift cards can be excludable from taxes under certain circumstances as De Minimis Benefits. To be excludable the gift card must only be redeemable for a specific item, such as a Thanksgiving turkey, and of minimal value. However, if that gift card is for general merchandise, such as a Target gift card, it is then taxable.
- Employers may consider grossing-up the amounts given on their gift cards to account for difference deducted taxes. It can be beneficial to do this and you may avoid surprising employees when then the post-tax value of their gift card is less than initially stated.
- Consider giving employees gifts that do qualify as de minimis fringe benefits to avoid worry of taxation. If the benefits qualify for exclusion, no reporting is necessary.