In today’s competitive job market, giving gifts and other fringe benefits to employees can be an effective way for employers to show appreciation. But generous employers should understand that most gifts and bonuses—even small ones—have tax implications.
Employee gifts must be taxed and included on year-end tax forms unless they qualify as de minimis benefits, are presented as achievement awards, or are given with no business purpose. To avoid running afoul of the Internal Revenue Service (IRS)—and causing employees to receive an unexpected tax bill—employers should consult their tax advisor before making gifts to employees.
Gifts to Employees and the IRS
An employee’s taxable income includes all payments received for work. Salaries and wages, commissions and tips, bonuses and awards, and stock options are among the most common taxable income sources. The IRS also considers anything an employer gives an employee to be a form of taxable compensation (with a few exceptions). Internal Revenue Code (I.R.C.) § 102(c) explicitly states that gifts to an employee are not excluded from the employee’s gross income.
The IRS’s policy on gifts makes it more difficult for employers to be spontaneously generous. However, if gifts did not have tax implications, it would incentivize businesses to restructure employee compensation to avoid taxes. Employees might be paid lower wages supplemented with gifts, thus lowering payroll taxes and taxable income.
De Minimis Benefits Excluded from Taxable Income
I.R.C. § 132(a)(4) excludes de minimis benefits—benefits that are too minor or trivial to merit consideration—from taxable income. According to the IRS, the following are examples of minimal or occasional employee benefits that qualify as de minimis[1]:
- Employee-of-the-month parking
- Occasional award or holiday dinners
- Occasional coffee, donuts, and snacks
- Group term life insurance
- Achievement awards and plaques, coffee mugs, flowers, and other small gifts
- Birthday or holiday gifts (other than cash) with a low fair market value
- Occasional meal money for overtime employees
- Personal use of a cell phone provided by the employer primarily for business purposes
- Occasional theater or sporting event tickets
- Certain transportation fares
Other types of employee fringe benefits such as dependent care assistance, employee discounts, and health savings accounts may also be tax-exempt if they meet certain conditions and limits. For more information, see the IRS’s Fringe Benefit Guide.
What Is Not Considered De Minimis
The IRS uses the term “occasional” for benefits that are rarely provided. Benefits provided routinely are probably not de minimis. For example, a one-time ticket to a sporting event may be de minimis, but season tickets are not.
The IRS does not identify a particular dollar amount that qualifies as a de minimis fringe benefit. However, the IRS has ruled that items worth more than one hundred dollars could not be considered de minimis under any circumstances.
Employer-provided cash or cash equivalent items are taxable. Per the IRS, a gift card is considered a cash equivalent unless it “allows an employee to receive a specific item of personal property that is minimal in value, provided infrequently, and is administratively impractical to account for.”[2]
Employee Achievement Awards
An employer may give an employee a tax-free achievement award only if strict rules are followed. The award cannot be disguised wages that involve cash, a cash equivalent, vacation, meals, lodging, theater or sports tickets, or securities. In addition, to be tax-free, the award must be
- tangible personal property,
- awarded for length of service or safety,
- awarded as part of a meaningful presentation, and
- a qualified plan award.
There are additional requirements specific to achievement and safety awards. Dollar limitations must be met as well. Full details are available in the IRS Fringe Benefit Guide.
Personal Gifts
Personal gifts, as opposed to gifts given in the context of employment, fall in a gray area with respect to tax implications. Although it is possible for an employer’s gift to an employee to have no business purpose, this is difficult to prove. In Duberstein v. Commissioner, the United States Supreme Court ruled that a gift can be considered tax-free if it is made through “detached and disinterested generosity” or “out of affection, respect, admiration, charity or like impulses.”[3] In Larsen v. Commissioner, the United States Tax Court stated that a payment from an employer to an employee can be considered a personal gift if it is “completely unrelated to the employment relationship and reflects no expectation of a business benefit.”[4] Despite these exceptions, the courts found in both cases that the financial transfers in question were payments and not tax-free gifts.
Contact Us
If you are considering giving gifts to your employees, reach out to us to ensure that you provide them strategically to benefit you and your employees. We are ready to meet with you to discuss your best options.
[1] De Minimis Fringe Benefits, Internal Revenue Serv., https://www.irs.gov/government-entities/federal-state-local-governments/de-minimis-fringe-benefits (Apr. 12, 2021).
[2] Id.
[3] Duberstein v. Comm’r, 363 U.S. 278, 285 (1960).
[4] Larsen v. Comm’r, 95 T.C.M. (CCH) 1273 (2008).
