If you are looking to buy your employees a gift as a token of your appreciation, there are a few things to keep in mind. Tangible gifts are not considered taxable income to employees as long as they fall under the definition of a de minimis fringe benefit. According to the IRS, a de minimis fringe benefit is a gift “for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable and impractical.” While the IRS does not set a maximum dollar amount for excluding de minimis fringe benefits from an employee’s taxable income, the business can deduct no more than $25 of a gift to any one person each year. For example, if each employee is given a prime rib roast that cost $50, only $25 of each roast is deductible to you as an employer.
Cash and Cash Equivalents
Many business owners would like to reward their employees with a monetary holiday bonus. Whether in the form of cash, gift cards, or gift certificates, these items are compensation and must be included in the employee’s income. As such, the holiday bonus is considered wages and must be reported as payroll on the employee’s W-2, subject to all applicable payroll taxes (Federal and State withholding, Social Security, Medicare and Unemployment). For you as an employer, the bonus is reported as wages and is fully deductible.
Gift cards and gift certificates are treated the same as cash; you must withhold taxes from the employee’s pay for these gifts. Please be aware, cash payments to your employees recorded as expenses other than payroll on your books are not tax deductible.
The preferred method to award a holiday bonus would be to include the bonus on the employee’s regularly scheduled payroll. When issuing a bonus outside regular payroll, IRS requires different tax treatment of State and Federal Withholding, if you are unaware of these requirements, please contact our office.
It is important to note that the bonuses described above are not performance based, as the treatment for performance related bonuses may need to be handled differently. If you would like to give your employees a bonus based on the profitable performance of the company and/or employee, please contact us before doing so.
With the major changes to meals and entertainment related expenses under the Tax Cuts and Jobs Act you are still able to host a fully deductible holiday party for employees. However, all employees must be invited to attend the party in order for it to remain 100% deductible.