Tax Rules of Employee Gifts and Company Parties

Businesses considering a "small gift" for employees -- a turkey or ham -- or throwing a Christmas party should know if they are taxable. Because a “gift” is often considered by the Internal Revenue Service (IRS) to be compensation, it’s important to note the rules so that your employees are not responsible for paying taxes on their gifts.

Gift vs. Compensation

As a general rule, an employer can't really give you a "gift" under the tax code. With only a couple of exceptions, the IRS considers anything your employer gives you to be taxable compensation for your services. Why? There's a simple reason for it. If your employer was allowed to give you a gift, it could just reclassify your wages as a gift, and you wouldn't have to pay any taxes on it. Your employer might have to pay gift tax -- but it would avoid the payroll taxes employers have to pay on wages.

'De Minimis' Gifts

That said, the tax code allows employers to give "de minimis" gifts -- stuff that's small and inexpensive enough that it would be "unreasonable or administratively impracticable" to expect them to account for it as compensation. So if your employer gives out mugs at Christmas, the IRS isn't going to insist that you send in the monetary equivalent.. Typically, the general cutoff for de minimis gifts is about $25. Cash, however, cannot be a de minimis gift, nor can cash equivalents such as gift cards. Those always count as compensation. Here's a closer look at a few more categories of gifts:

  • Nontaxable gifts: Fruit baskets, hams, turkeys, wine, flowers and occasional entertainment tickets, such as for a show or sporting event, generally are nontaxable de minimis fringes.
  • Taxable gifts: Gift certificates (cash in kind) are wages subject to taxes -- even for a de minimis item. For example, a gift certificate for a turkey is taxable, even though the gift of a turkey is not. Cash gifts of any amount are wages subject to all taxes and withholding.
  • Gifts Under $25: Gifts under $25 are typically tax-exempt.
  • Noncash prizes. Include the fair market value in wages subject to taxes.
  • Holiday (or any) parties. The cost of occasional parties is nontaxable to employees and their families as a de minimis fringe -- if they are infrequent and for the purpose of promoting employee health, good will, contentment, or efficiency. Examples: occasional holiday celebrations, cocktail parties and company picnics. Such parties are fully deductible to the business -- they are not subject to the 50 percent limit on business meals.
  • Making a Charitable Donation on Your Employee's Behalf.

 

Employers Paying the Tax

If an employer opts to go ahead with a gift not listed above that costs more than $25, he or she should just get ready to pay for it. This means the employer should be willing to pay the gift amount and also the amount it’s taxed for so that the remaining amount can be given to the employee without he or she worrying about taxes. For example, if you want to give a $50 gift to your employee, you're likely to end up spending more in the long run.