Can I Give My Employees Gift Cards for Christmas?

Employers often show appreciation to employees, especially during the holiday season, by offering gifts. While seemingly straightforward, giving gifts, particularly gift cards, involves various tax implications that both employers and employees should understand.

Tax Treatment of Gift Cards for Employees

Gift cards provided to employees are generally considered taxable income. The Internal Revenue Service (IRS) treats gift cards as “cash equivalents” because they have a clear monetary value and can be used like cash for general merchandise or services. Their value is subject to federal income tax, Social Security, and Medicare taxes, regardless of the amount.

The concept of a “de minimis fringe benefit” is relevant to gift cards. The IRS defines a de minimis benefit as property or service provided to an employee with such small value that accounting for it would be unreasonable or administratively impractical. These benefits are typically excluded from an employee’s gross income.

However, cash and cash equivalents, including gift cards, generally do not qualify as de minimis fringe benefits. The IRS specifically excludes cash and items easily converted to cash from de minimis treatment, even if the value is small. This is because their value is readily ascertainable and accounting for them is not impractical. Even a small gift card to a general retailer is typically viewed as taxable income.

Examples of items that might qualify as de minimis fringe benefits include occasional snacks, coffee, or doughnuts provided in the workplace. Other examples include occasional tickets for entertainment events, traditional holiday gifts like a ham or turkey, or flowers provided under special circumstances. These items are typically non-cash and would be administratively difficult to track and value for each employee. They are not easily convertible to cash and are provided infrequently, unlike gift cards.

Employer Deductions and Reporting for Gift Cards

When a gift card is considered taxable income to an employee, its value is generally deductible by the employer as an ordinary and necessary business expense. This deduction applies because the gift card is treated as a form of employee compensation.

Employers have specific reporting requirements for gift cards provided to employees. The fair market value of the gift card must be included in the employee’s gross wages on their Form W-2. This inclusion means the gift card’s value is added to Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages and tips) on the W-2 form.

The inclusion of the gift card value on the W-2 also means it is subject to federal income tax withholding. Additionally, the value is subject to Social Security and Medicare (FICA) taxes, as well as federal unemployment (FUTA) tax. Employers are responsible for withholding these taxes from the employee’s pay and remitting them, similar to how regular wages are handled. State and local tax rules may also apply to employee gift cards, and employers should consult their specific jurisdiction’s requirements.