It is that time of year when employers consider giving gifts to their employees. We often assume gifts have no tax consequences; however, that is not always the case. When an employer gives its employees holiday gifts or bonuses, it may be a taxable event subject to both income tax and payroll tax.
According to the IRS, the term gift refers to a “detached and disinterested generosity.” In contrast, it seems employers are providing the gifts either in appreciation of past performance or as an incentive for future performance. Many employers want to “thank” the employees for their hard work throughout the year. From the IRS point-of-view, that is not a “detached and disinterested generosity.”
So are all gifts to employees taxable? Not exactly, there is a major exception: de minimis fringe benefits are not included in income. (IRC § 132(a)(4)). A de minimis fringe benefit is any property or service for which accounting for it is unreasonable or administratively impracticable considering the value and frequency of the gift. Cash (or cash equivalent like a gift card) is not administratively burdensome to value and therefore is not a de minimis fringe benefit. Basically, if you are giving cash (ie a bonus) or something equivalent to cash (ie a gift card), that is income and must be included on the employee’s W-2 and is subject to payroll and income taxes.
So can you give a $200 fruit basket and exclude it from income as a de minimis benefit? After all, it isn’t cash, and who really knows the value of a fruit basket, right? Not exactly. The gift must be of “nominal value” to be excluded from income. The IRS does not define “nominal value,” but it is clear an item with value over $100 is not considered de minimis. However, many experts advise “nominal” is much lower, either $25 or $50.
Bottom Line: As an employer, if you don’t want the employee to be taxed on the holiday gift, don’t give cash or gift cards. For other items, make sure the value is nominal. Or, consider forgoing the individual gifts and provide a reasonable holiday party for employees, or make a charitable contribution on their behalf.