Tax Implications of an Employee Gift Vs. Compensation

Employee gifts may be considered compensation for tax purposes.

Certain employee gifts are considered compensation by the Internal Revenue Service (IRS) and are subject to normal payroll taxes. While gifts in general are not taxable, employee gifts are considered compensation for past performance or as an incentive for future employment rather than strictly a gift.

Cash

Cash, gift certificates or any gift easily redeemable for cash should be reported as income through payroll.

Dollar Amount

While no firm rule applies, generally accepted practices set forth a $25 guideline on gifts. If a gift is over $25 in value, it should be included in payroll and taxed accordingly.

Exceptions

De minimis fringe benefits include such items as nominal gifts like the occasional use of the copy machine, holiday gifts and birthday gifts as exempt from inclusion as income, provided the gift is not cash or a cash equivalent. Employers may also infrequently treat employees to meals, event tickets, picnics, etc. without including the cost in the employee's wages received.

Employers may also gift employees with disaster relief payments that are reasonable for the amount of damage the employees incurred without reporting it as income.

References

• The American Institute of CPAs: Giving Employees Gifts May Require Giving to the Tax Collector Too