Overview: Employers often give gifts to employees as a gesture of good will during the holidays, to boost morale in the midst of a tough project or as a reward for achievements. If not approached carefully, however, those well-meaning gestures could end up being taxable wages to your employees.
Under the Internal Revenue Code, the fair market value of gifts employers give to employees is generally subject to federal income and Social Security and Medicare (FICA) tax withholding and to federal unemployment insurance (FUTA) tax. However, there are three classes of gifts employers may provide to employees on a tax-free basis:
A de minimis fringe benefit is any property or service provided to employees that has so little value that accounting for the benefit would be unreasonable or administratively impractical. However, the frequency with which similar benefits are provided to employees is a key consideration. A gift can be of small value, but if it is provided frequently and is not administratively difficult to account for, it is not a de minimis fringe benefit and its value will be taxable wages to employees.
Common examples of gifts that may qualify as de minimis include annual birthday or holiday gifts of items with a low fair market value, such as a box of chocolates or a turkey, occasional theater or sporting event tickets, and flowers, fruit, books or similar items provided to employees under special circumstances (e.g., an employee's illness, outstanding performance or family crisis).
Cash and cash equivalents (e.g., gift cards, charge cards and credit cards) given to employees can never qualify as de minimis fringe benefits; their value is fully taxable to employees as wages.
Author: Rena Pirsos, JD, Legal Editor
HR and legal considerations for employers regarding gifts to employees.