Employee Gifts – Are They Taxable?
November 26, 2019
By Wendy Thompson of Yeo & Yeo CPAs & Business Consultants
‘Tis the season when employers often will provide employees with “gifts” of some type. We all know the entity in town that gives all of its employees a turkey for Thanksgiving or Christmas. While this is a wonderful gesture on the part of the employer, is it compensation to the employee?
A general rule of thumb is to assume that all compensation, which includes gifts, to employees is taxable. There are exceptions to that rule, but they are the exceptions and not the general rule.
The main exception to taxable compensation is De Minimus fringe benefits. There is no set dollar threshold on these; above $100 fair value is not de minimus, but just because it is $25 or less does not automatically make it de minimus. The intent is that the value of the benefits is small (per person and at the entity level), the frequency is infrequent, and it would be an administrative burden to track. This means if the entity is tracking the items itself, such as in inventory, it is not an administrative burden and is not de minimus. However, cash or “cash equivalents” (which includes gift cards, gift certificates, etc.) are never de minimus.
This means that the Subway gift card that is given to select winners in the staff meeting each month is taxable to the employee, even if it is only $10, and should be included in their W-2. However, that Thanksgiving turkey, which is a coupon redeemable for a turkey, and only a turkey, with a value of $X or less, is not a cash equivalent. It is in essence personal property (food) and could be de minimus if the employer deems it a small benefit, the frequency is infrequent, and it would be an administrative burden to track. The Subway gift card is used in place of cash; I could use it as part of multiple different transactions and it has a set face amount that I can use. The coupon instead can only be used in one transaction and it has a maximum face amount, but if I choose a small turkey and do not utilize the entire face amount, I lose the rest. If I choose too large of a turkey that is above the face amount, I cannot simply put that face amount towards the turkey; I must pay for the entire turkey. Therefore, that coupon is not a cash equivalent.
The sweatshirt that you get for free upon joining the organization may qualify as a de minimus fringe if it otherwise meets the criteria. The fact the sweatshirt has the company logo on it does not affect the decision, as you can wear a company sweatshirt anywhere, not just at work. You must look at the value of the benefit (typically its cost to the employer), the frequency, and the administrative burden. If instead it was a hazmat suit that can be worn only at work, it would be a working condition fringe and nontaxable.
Employee achievement awards are not taxable to the employee. However, these have a very strict definition.
First, they are items of tangible personal property and not cash or cash equivalents.
Second, the award must be for either 1) a length of service or 2) a safety achievement and must be presented as part of a meaningful presentation.
Also, the nontaxable amount cannot be more than $400 for any employee.
The general rule of thumb is that all items given to employees are taxable unless they fit into an exception. If you have specific circumstances you would like to discuss, please reach out to your Yeo & Yeo professional.