Gifts to employees or customers are a traditional way to spread cheer and thanks to people important to your business during the holiday season.
But the IRS says certain types of gifts are taxable and making sure you follow the rules can avoid a Grinch-like spoiler later.
The good news is all gifts and awards to employees are deductible expenses for employers.
Some gifts, however, are treated as taxable income to the employee.
For example, all cash or gift cards redeemable for cash are taxable to the employee, even when given as a holiday gift. Likewise, 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. Withholding applies.
- On the other hand, non-cash gifts of minimal value, such as a holiday turkey, mostly are not taxable for employees if they are under $75 per year.
- Gifts worth more than $75 are taxable.
- 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. The tax-free value is, however, limited to $1,600 for all awards to one employee in a year.
Gifts to Customers
Many companies also give gifts to highly valued customers during this time of year.
The IRS is less generous about giving companies a break on these gifts and limits how much a business can deduct to $25 in gifts per person per year. This $25 limit applies whether the gift is given directly to an individual customer or indirectly to the company, but intended for individuals.
Giving a gift to a customer’s family does not get around the limit. Those gifts 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 with 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.