Employee Gifts and Awards: What are the Tax Consequences?
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ith the holidays coming up, it's a good time to review the tax rules involved in giving gifts to employees. The taxability of employee gifts generally depends on the value and the type of award. Here are some questions and answers that illustrate the complexity of the issue:
The following are six general rules on the taxation of gifts, awards, and incentives given to employees:
1. Monetary prizes, awards, bonuses and gift certificates, including achievement awards, are generally considered taxable compensation subject to federal and state income tax withholding, unemployment tax, and FICA taxes.
2. Prizes, bonuses, awards that involve goods or services, such as a vacation trip for meeting a sales goal, also generally result in taxable income.
3. "Tangible personal property" awarded to employees to recognize the employees' length of service or safety achievement is not taxable. However, there are strict rules to follow for tax-free treatment that we'll describe later. 4. The term "tangible personal property" does not mean cash or gift certificates. Although the definition of "tangible personal property," is unclear, most tax advisers take the position that certificates and other types of awards redeemable for merchandise -- such as points and cards with point values -- are taxable. One exception: If the merchandise is given as an employee achievement award and meets IRS rules. 5. Awards and gifts of minimal value, such as a holiday turkey, generally fall under the IRS's de minimis rule and are not taxable. That rule says if an employer provides an employee with a product or service that costs so little that it would be unreasonable for the employer to account for it, the value is not taxable income. (Cash awards and gift cards/ certificates redeemable for cash are not included under the de minimis rule.)
In some cases, the value of employee achievement awards can be excluded from taxable income. However, the award must involve something other than cash, a gift certificate, or other cash-equivalent item, and must be given for length-of-service or safety achievement. The amount that the employee can receive tax free is limited to the employer's cost and cannot exceed $1,600 ($400 for awards that are not qualified plan awards) for all awards the employee receives during the year. In addition, the employer must make the award as part of a meaningful presentation. The tax-free employee achievement award exception does NOT apply if: The length-of-service award is for less than five years of service or if the employee received another length-of-service award during the year or the previous four years. The safety achievement award is given to a manager, administrator, clerical employee, or other professional employee. More than 10 percent of eligible employees previously received safety achievement awards during the year.
What's considered minimal? Most tax advisers say $25 to $75 to an employee in a year. Consult with your tax adviser on the de minimis amount to use in your situation.
6. The value of holiday gifts, such as merchandise or tickets to sporting events, in excess of the de minimis amount is taxable income.
Smart idea: When giving gifts to employees, explain the tax implications upfront if there are any. That way, there won't be any unexpected surprises later that might spoil your generosity. Consult with your tax adviser for more information.
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