Employee Gifts and How they Affect Payroll Taxes

By:  Mark Ward
‘Tis the Season where many employers give gifts to their employees.  The Internal Revenue Service (IRS) has very specific code about gifts that employers give to their employees.  As you evaluate the gifts your business may be giving I thought it would be helpful in this article to review the IRS Code associated with employer gifts and how they relate to payroll taxes.

In determining whether or not a gift is treated as simply a gift, or as supplemental wages that need to be reported on an employees’ W-2, the courts often look at the employers’ intention in giving the gift.  Most court cases that I’ve looked at, the IRS successfully argued that the employer’s intention in giving the gift is to reward an employee for prior performance or to incentivize the employee for future performance.   Where this is the case, generally speaking most gifts employers give are treated as supplemental wages.  In being treated as supplemental wages the employee and employer must pay the associated payroll taxes.

Let’s look at a few exceptions.  All employers provide “De Minimis Fringe Benefits” to their employees.  De Minimis Fringe Benefits are known as “property or services, the value of which is so small as to make accounting for it unreasonable or administratively impracticable” (Littler Mendelson, P.C).   A few examples of this are personal use of office equipment, group meals, theatre or sporting event tickets, or holiday gifts with low market value.   A suggested Dollar Amount that I’ve seen associated with “De Minimis Fringe Benefits” that are excluded from supplemental wages is property or services that cost around $40.00.  Obviously there are tickets, services or gifts that can cost more and they can still qualify – just increased scrutiny.

Cash or Gift Cards are never considered a Fringe Benefit.  If an employer is considering giving employees a Thanksgiving Turkey the employer can purchase and give turkeys to employees and have them considered Fringe Benefits and not taxed.  However, if the employee gives cash or a gift card for the turkey then the gift must be treated as supplemental wages and must be taxed.  If the gift you are giving is easily exchangeable for cash the gift is likely going to be treated as supplemental wages.

Gifts given for Achievement Awards are treated differently and have their own set of rules.  To see the code for Achievement Awards see IRS publication 15.

Please Report all bonus amounts and supplemental wages to Payroll Experts by December 31st.  This will allow us to properly tax the wages and help keep you in compliance with IRS regulations.  If you have questions about specifics please do not hesitate to contact us.


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