The general rule regarding gifts to employees is that they are taxable income to the employee.
There are some exceptions to this general rule. Two of the more common exceptions are:
- Employee achievement awards
- De minimis (small) fringe benefits
Employee achievement awards are nontaxable. These awards are tangible property that is given to the employees as a reward for length of service or for achieving some sort of a safety standard.
The IRS worries that employee achievement awards are actually a form of disguised compensation. That is why when the company is giving out these awards, they should be presented in some type of ceremonial format.
The amount of the gift that the employee is allowed to exclude from income is tied to the amount the company claims as a deduction. If the awards are given by a company that does not have a qualified plan, the maximum amount of the deduction for the company is $400. Therefore, the maximum amount the employee is able to exclude from income and treat as a nontaxable gift would be $400.
So, for example, if the employee received an award with a fair market value of $650, $400 of that would be considered a gift and $250 would be considered taxable compensation.
If the gift is given to an employee by a company that does have a qualified plan – an established written plan that does not discriminate in terms of eligibility or benefits to highly compensated employees – the maximum amount of the deduction for the company would be $1,600. The employee would then be able to exclude this same amount from income and treat it as a gift.
Other categories of gifts that are nontaxable are de minimis fringe benefits. De minimis fringe benefits are property or services that are so small as to make accounting for it unreasonable or administratively impracticable.
Not all de minimis fringe benefits are gifts. In fact, most are not. The IRS provides some guidance on what a de minimis fringe benefit is. The following three items are considered to be de minimis fringe benefits that impact the discussion of nontaxable gifts:
- Birthday or holiday gifts of property with a low fair market value.
- Occasional theater or sporting event tickets.
- Flowers, fruit, books or similar property provided to employees under special circumstances.
These three items would be considered gifts and not added to the employees W-2 wages.
Employers that give gifts to employees for the holidays would be well advised to know what the rules are. Otherwise that gift might end up being taxable income to that employee.