Before We Close The Year - Taxation of Employee Gifts
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The company Christmas parties have been completed, gifts given, we are done right? Maybe. It is possible that the Christmas gifts we have given our employees have to be included in their taxable wages!
Let’s look at the rules. In Publication 15b the I.R.S. states that employers can give employees de-minimis gifts, or gifts that have a minimal value. It also requires that accounting for these gifts would be administratively impractical. So what is de minimis? There is not dollar value stated in the I.R.S. code. For years the accepted amount has been $25.00. In other words a company can give an employee $25 a year in de minimis “stuff”, not cash. Any value over $25 is taxable income to the employee.
The question is; how are these gifts reported? It depends. If the gift is for “services rendered”, such as sales awards, the fair market value of these gifts is to be included on the employee’s W-2. If the gift is by random selection, such as a raffle at the Christmas party, then the gifts fair market value is reported on a 1099 Misc. in box 3, and then only if the fair market value is over $600. If the fair market value is under $600 the employee is required to report the value on their personal return even though a 1099 Misc. was not filed.
What about cash gifts? Simple, any cash gift is taxable to the employee on their W-2. The I.R.S. considers all gift cards and gift certificates as cash payments, so they are taxable in any amount. The only exceptions the I.R.S. provides are occasional meal or travel funds, and then only in de minimis amounts.
One more twist. Consider this scenario. A vendor of your company gives your company a gift to give to one of your employee’s. Even though that item did not cost your company a penny, when you give that item to the employee it will be taxable. If the item is given for “services rendered” (i.e. Sales award) then it goes on the W-2. If it is given to the employee as the result of a raffle at the Christmas party, and the fair market value is over $600, then it is reported to the employee on a 1099 Misc. in box 3.
Employers have until the end of the calendar year to record taxable gifts to employee’s earnings. If you have questions regarding employee gifts then contact firstname.lastname@example.org. Happy New Year.