Ideas: Best Practices Tax Benefits of Gift Certificates as Holiday Employee Gifts
Cash gifts and many gift certificates are considered taxable income that must be reported. But some gift certificates are exempt under the IRS d
e minimus rule. This article describes the difference, and how your employee gifts can not only be non-taxable for employees but may also be deductible as a non-wage business expense by the employer.
Don’t Sacrifice Emotional Value
The most effective employee gifts, with the highest ROI in terms of enhanced relationships, and employee loyalty and productivity, are those that provide emotional value beyond the market value of the gift. In fact, some of the best gifts have a small dollar value, but generate powerful positive emotions that make them very impactful and memorable.
But if the employee discovers that he must pay taxes on the gift it may cause him enough frustration to negate the emotional value of the gift. Be sure you and your accountant and your tax attorney have considered the tax implications of the gift you are considering. Here are some points you should consider:
Gifts Considered Taxable Wages
High value gifts, cash gifts, and some gift certificates given to employees must be treated as taxable income to the employee and may not be deducted as a business expense by the employer. There is no set dollar limit, but the IRS has ruled in one particular case that a gift with a market value over $100 must be treated as taxable income. In some situations a gift of even nominal value might be considered taxable. (“FAQs regarding De Minimus Fringe Benefits”, IRS, http://www.irs.gov/govt/fslg/article/0,,id=155764,00.html)
Cash gifts are almost always considered taxable wages regardless of the amount. Gift certificates that are redeemable for a broad range of products are considered cash equivalents and must be reported as income. This would include gift certificates and gift cards issued by a retailer that are good for any item in the store, or for any of a significant variety of items.
Another Argument Against Cash Gifts
Even without these tax complications, cash gifts and retailer gift certificates yield lower ROI than most gifts in terms of employee satisfaction and loyalty. Even though they may have high market value they carry little emotional value and are easily forgotten as they become mingled with the cash purchases of the employee. Often the employee will not even remember what was purchased with the cash, gift certificate, or gift card. Contrast this with a gift of a turkey or ham during the holidays, which carries high emotional value that is retained for a much longer time.
The De Minimus Exclusion
However, if the dollar value of a non-cash gift is relatively low and it is given infrequently it may qualify for the “de minimus benefit”, would be non-taxable to the employee, and would be deductible as a non-wage business expense by the employer. According to the IRS, “In general, a de minimus benefit is one for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical. This would include such items as…occasional tickets for entertainment events, holiday gifts…flowers, fruit, books, etc., provided under special circumstances. In determining whether a benefit is de minimus, you should always consider its frequency and its value. An essential element of a de minimus benefit is that it is occasional or unusual in frequency. It also must not be a form of disguised compensation.” (“FAQs” article previously cited)
The IRS further states: “If, to promote employee goodwill, you distribute turkeys, hams, or other merchandise of nominal value to your employees at holidays, you can deduct the cost of these items as a nonwage business expense. Your deduction for de minimus gifts of food or drink are not subject to the 50% deduction limit that generally applies to meals.” (IRS Publication 535 – Business Expenses for use in preparing 2005 Returns)
As mentioned above, gift certificates good for a broad range of products are considered cash equivalents and do not qualify for the de minimus exclusion. However, gift certificates
“which can be applied only to a choice of one type of item would generally be considered noncash and could be tax-exempt as de minimus benefits.” (“FAQs” article previously cited) Therefore, for example, a gift certificate good for a free turkey is considered by the IRS the same as an actual turkey, qualifies for the de minimus exclusion, is not taxable to the employee, and qualifies as a deductible business expense by the employer.
In our experience gift certificates for a free turkey are also considered by the employee the same as an actual turkey, and carry the same high emotional value. In fact, they are often preferred to an actual turkey because they are more convenient: The employee can choose the turkey he prefers and pick it up at the time and at the store that are most convenient for him.
Because of tax disadvantages as well as lower ROI, gifts of cash and cash equivalents should be avoided. Stay away from gift certificates and gift cards issued by specific retailers or supermarkets. Instead, stick with gift certificates good for only one type of item of moderate value. These will be more appreciated, will generate higher employee goodwill, loyalty, and productivity, and offer significant tax advantages.
Disclaimer: We offer the above only as points to consider, not as expert legal or accounting advice. Please consult with your attorney for interpretation of current laws and regulations and for counsel relative to your specific circumstances.
©2006 PFR Corporate Gifts, Inc. May be reprinted unedited in whole with proper credit given.
For other related articles go to our “Best Practices” section.
PFR Corporate Gifts, Inc.
779 East 9400 South, #131
Sandy, UT 84094