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.

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 FIT, FITW, FICA, and FUTA -- 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. [26 CFR 1.132-6(e); TAM 200437030]

Noncash prizes. Include the fair market value in wages subject to FIT, FITW, FICA, and FUTA. [Rev. Rul. 57-18, CB 1957-1, 35]

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% limit on business meals. [IRC 132]

For a free report, How to Tax 2008 Bonuses, Gifts, Prizes, and Awards, e-mail info@aipb.org.