This time of year employers start thinking about holiday bonuses and gifts for their employees. The type of bonus or gift that is ultimately given will have varying tax consequences, often overlooked by employers, and could result in unforeseen taxable income to the employees.
Giving a cash bonus to employees during the holidays, or anytime throughout the year, is treated as taxable income to the employee. The amount of the bonus will be subject to payroll and income taxes as if they were normal wages.
A small property gift given to an employee will most likely be excludable from income as a de minimis fringe benefit. In order for a gift to qualify as a de minimis fringe benefit, it must be property or service that is small in value, infrequent, and accounting for such gift would be administratively impracticable. Tax law specifically states “traditional birthday or holiday gifts of property (not cash) with a low fair market value” will qualify as a nontaxable de minimis fringe benefit.
This has led to many questions about gift certificates and gift cards given to employees. Since they aren’t cash and tend to be relatively low in fair market value, many assume they are de minimis fringe benefits. Unfortunately, the IRS has not come to the same conclusion. Tax law says that because gift certificates and gift cards are cash equivalents, or easily convertible to cash, they do not meet the requirements to be excluded from income. Furthermore, since the value of the gift card or gift certificate is easily determinable, they must be treated as wages, subject to payroll and income taxes.
Moral of the story: if you give your employee a holiday ham, it will be excluded from their income. If you give your employee a VISA gift card to purchase a holiday ham, it is income to the employee, subject to payroll and income taxes!