If you run a business and your good cheer includes giving gifts to employees or customers, the IRS has been thinking about you.
- Are these gifts deductible for the company?
- Are they taxable for the recipient?
As usual, it depends.
Here is a brief guide to the rules. For more detail, consult your tax adviser.
Employee gifts, awards and incentives
- Gifts of minimal value, such as a holiday turkey, mostly are not taxable for employees.
What’s the definition of minimal? Generally $25 to $75 per employee each year. Gifts worth more than that are taxable. (All amounts of cash or gift cards redeemable for cash are taxable, however.)
- On the other hand, monetary prizes, including achievement awards, as well as non-monetary bonuses like vacation trips awarded for meeting sales goals, are taxable compensation — not just for income taxes, but also for FICA and unemployment taxes. Withholding applies.
- Gifts awarded for length of service or safety achievement are not taxable, so long as they are not cash, gift certificates or points redeemable for merchandise. Tax-free value is, however, limited to $1,600 for all awards to one employee in a year.
The good news is all these gifts and awards, regardless of whether they are taxable to the employee, are deductible expenses for employers.
Gifts to Customers
Deductions for gifts to customers are limited to $25 in value per person per year, whether given directly to the individual or indirectly to the company, but intended to eventually be given to the individual.
Gifts to members of a customer’s family are treated as though they were given to the customer and are subject to the total limit for the customer. Similarly, gifts from different members of a partnership to one person are treated as though they all are coming from one source and the total deduction is limited to $25.
A bit of good news: Incidental costs, such as engraving, packaging, insurance and mailing generally do not count against the $25 limit.
Download LBMC's Employee Gift Tax Infographic
Download this infographic explaining six general rules on the taxation of gifts, awards, and incentives given to employees.