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A Guide to Everything About Employee Gifts Tax

Employee with gifts around holiday season

When the holidays were approaching once again, we were looking to know everything about employee gifts tax. My colleague leaned over and asked me, “Are employee gifts tax deductible?”

It’s a common thing businesses consider this time of year. Especially when they’re thinking about how they’ll spread the cheer to over 150 employees without going over budget. 

Gift expenses in accounting can be complicated, but once you understand the basics, they’re easy to remember. The one thing businesses have to consider when giving gifts to employees is the tax factor. Ah, yes, there it is. The good ol’ IRS sweeping in to make every business decision more fun.

The last thing you want is to pay more money on taxes. Especially because your boss decided to be extra generous this year. Uncle Sam wants you to spread that love around. 

So, our company started talking about how we could tackle gifting this year with employee gift tax in mind. We wanted to make sure none of our hard workers were forced to pay more because of a bonus, and we also wanted to see if there were any options for deductible gifts that would help us save more when tax season reared its head (does it come faster every year, or is that just me?)

Anyway, we decided that the best thing to do would be to head over to the ever-so-simple IRS website and start looking up tax policies. We found that under Internal Revenue Code Section 61, all forms of income are taxable (including bonuses and prizes) unless they’re excluded under the tax code. 

The search was officially on. We’d do some digging to find out exactly what employee gifts were taxable, and which were deductible for our business. Then we would plan an epic holiday gifting extravaganza that wouldn’t have any unexpected financial consequences.

Employee Gifts Tax Deductible

When it comes to corporate gifting, cost makes a huge difference in how people perceive their value to the company. Opting for the cheapest option per person ultimately sends the message, “We care more about our bank account than your effort.”

We have never been that business, and we didn’t mind taking a loss during the holidays if it meant our dedicated teams were able to receive gifts that truly captured how valuable they were to us.

That isn’t to say we went to ridiculous extremes, but we weren’t afraid to go the extra mile if it meant leaving a great impression and boosting company morale.

As we looked into answering, “Are employee gifts tax deductible?” we found that yes, you can write off up to $25 per person each year. So, not a lot.

That wasn’t so bad. We were happy to find that you can deduct holiday party expenses, so long as the party isn’t over-the-top extravagant. It should have food and beverages, but you won’t be able to write off anything lavish, like renting out a ballroom at a 5-star hotel and having a 4-course catered meal.

Entertainment is also not deductible, so we had to make sure whatever we chose was worth the expense. 

Are gifts tax deductible?

Not cash gifts to employees over $25.

Speaking of which, cash gifts were what we specifically wanted to learn more about. Holiday bonuses that were worth thousands would be classified as income, meaning they were employee gifts taxable by the IRS.

We wanted to avoid that, so we started looking into corporate gifting ideas instead. HR pointed us to SwagMagic, and we were instantly impressed with their catalog. We also loved their print-on-demand feature, which would let employees customize their own gifts, pick what they loved, and spare the company from having to pay for tons of merchandise in bulk.

a curated box fro SnackMagic makes a great gift

There was also the option to craft curated boxes. Which would be perfect for special events, birthdays, and congratulatory gifts when people got a promotion.

Are gift cards to employees tax deductible? 

Looking more into the IRS tax codes about employee gifting, we wanted to see what our options were for future events, too. If cash gifts are taxable, are gift cards taxable to employees as well? 

Cash gifts to employees count as a wage, so they aren’t tax-exempt. Furthermore, IRS rules on gift cards to employees state that any certificates that can be exchanged for general merchandise or have a real cash value count as income, too.

When it comes to buying gift cards as a business expense, you can deduct the total amount of the card as an expense. But you’ll have to withhold payroll taxes on the total amount of the card.

De Minimis Tax Rule

Were there any gifts to employees that wouldn’t cost them taxes? And what gift amount can you deduct as a business expense? Overall, are business gifts tax deductible?

To answer this question, we had to learn a lot about what the IRS calls de minimis fringe benefits. These are benefits that aren’t frequent. They’re so small that the government considers their value negligent and not liable to taxation.

The max amount of a de minimis gift is $25. This cannot be a gift card, gift certificate, or any currency that can be exchanged for real money. 

Interestingly, the IRS de minimis tax rule differentiates between gift certificates with a cash value and ones that employees can redeem for a special item of personal property. In that case, as long as the item is of low value and only offered infrequently (such as birthdays and holidays), it can be excluded from taxes. 

Ultimately, the de minimis tax allowance excludes any gifts that are valued over $100. So, even if you’re buying swag or making gift baskets for your team, they could be subject to taxation. This Is depending on how much they’re worth.

How to Avoid Gifting Tax 

Our company was fine not being able to write off every gift. But we wanted to give non taxable gifts to employees that wouldn’t up their financial burden come tax time. We ultimately settled on ordering some SwagMagic merchandise that was valued under $75 each. We gifted these directly to employees, so they wouldn’t have to worry about having to be taxed in exchange.

SwagMagic merch makes a great employee gift

Although it took a lot to learn, we were happy we took the time to cover all our bases. Our newfound understanding of IRS employee gifting rules would make it easier to choose the best gift options in the future.

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