As we prepare to celebrate the holidays, many employers are also getting ready to provide their employees with annual bonuses and holiday gifts. Beware: What may be a gift given in the spirit of thanks and appreciation could turn out to be taxable income for the recipient.
The Internal Revenue Service (IRS) considers many types of gifts to be de minimis fringe benefits for tax purposes, which means they may be given tax-free for your employee, but are still fully deductible for the business. Typical examples include:
- Gifts of property (not cash) with “low fair market value” given for occasions such as birthdays or holiday celebrations
- Gifts like flowers, books or awards given under “special circumstances,” such as recognition of outstanding performance
- Free sports, concert, or theater tickets given out occasionally
- An occasional group meal, company picnic, or staff party
- A gold watch upon an employee’s retirement
Note that the de minimis gifts cannot be cash and must be infrequently or occasionally given. Business partners, members of LLC partnerships, and those holding more than a 2% share in a company are eligible for this tax-free de minimis fringe treatment.
However, if you do give gifts or awards of cash, debit cards, gift cards, or other vehicles that could be converted to cash, the value is considered additional wages for the recipient, regardless of the amount given. The amount will be subject to employment taxes (e.g., FICA) and withholding taxes. One exception is gift certificates or gift cards that can only be redeemed in one location.
A company that recognizes employee achievement or length of service must also be cautious about presenting a ceremonial gift. There are very specific rules surrounding eligibility for recognition awards in order to avoid having them taxed as income.
- Length of service awards cannot be made during the first five years of employment, and cannot be awarded more than once in a five-year period. Otherwise they may be viewed as “disguised pay.”
- Safety achievement awards do not qualify as tax-free if they are given to a manager, administrator, clerical employee, or other professional employee; or if the safety award is given to more than 10% of eligible employees during the year.
- In both cases the recognition gift must be presented in a ceremonial setting.
Employee achievement awards fall under an even more complex set of rules. The pending Tax Cuts and Jobs Act, if signed into law, should clear up some of the confusion regarding the taxation of employee awards. For example, awards of vacations, meals, lodging, theater and sports tickets, stocks, bonds, and other securities will no longer be considered tangible property when given as an award. However, the Tax Cuts and Job Act may also do away with the exclusion of employee achievement awards for tax years beginning after December 31, 2017.
Thinking about giving holiday gifts to your employees? Avoid cash or checks, keep the value of the gifts reasonable, and document everything. Better yet, contact Gray, Gray & Gray’s Tax Department at (781) 407-0300 ahead of time for guidance on the best way to avoid giving a gift that ends up being taxed.