How Much Can You Gift An Employee Tax-Free?

Small business owners often wish to acknowledge their employees' hard work with gifts; but how much can you give an employee tax-free? As nice as it is to be generous with your employees, knowing the tax implications of employee gifts is essential. This is because the Internal Revenue Service (IRS) considers some gifts to be taxable income.

What Is Considered a "Gift"?

A gift can come in many forms, but essentially it's something you provide your employees, business partners, or clients free of charge. 

• A gift can be tangible, for example, flowers or tickets to an event.

• Alternatively, it could come in the form of cash or a cash equivalent. Gift certificates are one example of this. Some employees also like to give services, for example, a voucher for a spa or a weekend away.

Different types of gifts may be subject to taxes depending on the nature of the gift and its cash value. 

Gift vs Compensation

Gifts like candies, flowers, and other small items aren't considered taxable compensation. However, cash or cash equivalent benefits like gift cards are. In this way, cash an employee receives as a gift is subject to tax just like their regular salary, bonus, or any other type of cash award. This is because it's considered a form of compensation. It will therefore add to the amount the employee has earned during the year.

Cash received as a reward, for example in employee achievement awards, is also considered taxable income. Because there are potential tax consequences for employers and employees, both parties should be aware of the implications of giving and receiving gifts. An expert in tax planning services can help you with this.

Federal Gift Tax

Potential taxes on employer gifts aren't the same as the federal gift tax. This latter tax is a tax on large transfers of money or property from one person to another. In 2023, the threshold for the federal gift tax was $17,000. This rises to $18,000 in 2024 [1]. Please note that gift taxes on these amounts are paid by the giver, not the recipient.

Which Gifts Are Taxable?

Employees must report cash received as a gift or reward on their income tax return because these are taxable gifts. However, non-cash gifts are only taxable if their value goes beyond what the IRS considers a "de minimis" benefit.

What Are De Minimis Benefits?

The IRS describes a de minimis benefit as "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.” When considering if certain benefits qualify as a de minimis benefit, the frequency with which the benefit is given must be considered in addition to its value.

The de minimis rule extends to modest perks that employees can enjoy, for example: occasional snacks and refreshments, company-branded merchandise, , occasional meals,, and infrequent celebratory gifts. The value of these items would be considered non-taxable income.

How Much Is the Threshold for De Minimis Fringe Benefits?

There are different amounts to take into account depending on the nature of the gift. Your accountant can help you identify any taxable gifts to include on your tax return and also any potential sources of savings.

Employees should note that if a gift is considered too valuable to qualify as a de minimis fringe benefit, its full value is taxable, not only the amount that is above the limit.

What Doesn't Count as a De Minimis Fringe Benefit?

Perks or gifts given to employees that are not considered de minimis include:

• Season tickets to sporting or other events

• Use of a company car for commuting more than one day per month

• Membership in clubs or athletic facilities

• Use of facilities owned by the employer for a weekend

For example, if your business is located in Jacksonville, Florida, you couldn't give an employee a season pass to watch the Jacksonville Jaguars without that employee having to pay tax on the gift.

The Type of Gift

Cash or non-cash gifts may be subject to different regulations depending on the value of the gift.

Cash or Cash-Equivalents

Giving cash or cash-equivalent gifts has tax implications both for the employer and employee:

• When an employee receives a cash gift or bonus, the employer must calculate payroll tax withholding on the amount.

• This amount is included in the employee's income for that year and is taxed as ordinary income.

Non-Cash Gifts

Non-cash gifts are assessed and taxed according to their fair market value. A car given to an employee as a gift, for example, would need to have its value assessed and that figure would need to be reported as income.

The Value of the Gift

It can be hard to understand the exact value of what the IRS considers a "minimal" value. The IRS has provided some guidelines, but it's always best to consult your accountant to avoid making mistakes on your tax return.

If the gifts you give your employees are taxable, you must include them in the employee’s wage calculations on Form W-2. The value will be subject to income tax withholding as well as withholding for Social Security and Medicare.

The Frequency with which Gifts Are Given

Many companies like to give gifts during the holiday season to acknowledge their employees' hard work throughout the year. A gift basket or turkey received at this time would likely qualify as a de minimis benefit.

However, if an employee received a gift basket every week or every month, this would be an entirely different situation. Essentially, the IRS intends to prevent employers from disguising taxable compensation as gifts.

Are Gifts to Employees Tax Deductible?

You can generally deduct the cost of gifts to your employees or clients, but only up to $25 per person in any given tax year.

IRS Gift Record-Keeping and Reporting Requirement

Keeping thorough records of all your financial operations including gift-giving is one of the most important factors in keeping compliant with IRS regulations. Failure to properly record and report them can result in serious consequences for your business if errors or omissions are found during an audit.

Avoid Mistakes on Your Tax Return by Working with a Tax Professional

The tax code is full of regulations that are easy to miss without an expert eye. Gift-giving to employees is only one of the potential stumbling blocks employers can encounter.

Unfortunately, making mistakes on your tax return can prove to be costly. For that reason, working with an expert in tax planning can help you avoid errors and understand how tax matters like giving gifts work going forward.