The holiday season is traditionally a time when many employers hand out cash bonuses, awards and non-monetary gifts to employees. If you are planning on gifting employees this year, make sure you are aware of all the tax implications when doing so. The Internal Revenue Service treats most cash gifts and awards as additional W-2 wages that are subject to standard income and payroll taxes. The same is true of gift certificates and gift cards regardless of the dollar value of the gifts.
Consider handing out non-monetary gifts if you want to give something truly tax-free to your employees this holiday season. But even here, the tax-free status only applies to certain categories of noncash gifts and awards. For example, any award that involves a paid vacation trip or similar goods or services is fully taxable. So be prudent in your choices.
Employee achievement awards and gifts are usually considered a non-taxable benefit under IRS codes if they do not involve cash. For example, length of service awards for employees who have completed a minimum of five years with your company are typically not taxable. Similarly, safety awards are usually exempt from taxes as well so long as the awards are not handed out to every employee. The IRS allows employers to award “tangible personal property” to employees for such reasons so long as the property does not have a redeemable cash value. For instance, any noncash award that involves points or coupons that can be redeemed for merchandise would generally be taxable under IRS rules.
Consider giving your employees gifts that fall under the IRS’s non-taxable “de minimis” fringe benefit category. A de minimus gift is usually something that has so little cash value that it would be unreasonable to expect the employer to provide a full accounting of the award to employees. A holiday turkey is a perfect example of what the IRS would consider a de minimus gift. Other examples include doughnuts and coffee, fruit baskets and flower arrangements and tickets to movies and sporting events so long as the value of the tickets is below a certain threshold.
When gifting your employees this holiday season it may be a good idea to explain the potential tax implications with them in advance so they are prepared for any withholdings that may become necessary later.
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