Are Gift Cards for Employees Taxable? US Expert Insights
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Imagine this: You just found out the beneficial effects gift-giving could have on your team. So you decided to offer gift cards to your employees throughout the year as rewards and gifts, and as part of payouts. Now, you want to buy gift cards but are gift cards for employees taxable?
In this article, we will discuss tax on gifts, answer some of the most asked questions on this theme and offer some useful suggestions.
Why should you offer gift cards to your employees?
Giving gift cards to your employees can be a wonderful way to thank them for their efforts and contributions to the company. They bring value every day and their efforts should be appreciated. Employee incentives or gifts can have amazing effects on motivation and lower employee turnover. But before you buy gift cards for your entire team, there are some tax-related aspects you need to consider.
Why it is important to do it right
Gift cards represent a form of income that is subject to taxation. Because employee gift cards may have legal and financial implications for both the business and the employee, it is important to file taxes correctly. The value of a gift card given to an employee by their employer as payment or a reward is regarded as taxable income. This implies that the employee must pay income tax on the value of the gift card and that the employer must declare the amount of the gift card as income on the employee’s W-2 form. Penalties and fines can be applied to both the company and the employee for not declaring income or paying the necessary taxes.
If you want to be completely sure you are doing it right, we advise you to consult a tax specialist.
Are gift cards for employees taxable?
Yes, gift cards for employees are taxable since they are considered cash equivalent items by the IRS. In the past, companies were not taxed when giving employees cash benefits or gifts having a cash value of less than $25, like gift certificates. These were referred to as de minimis gifts or fringe benefits.
Today, that is no longer the case. The Internal Revenue Service (IRS) advises employers that, unless specifically excluded by a provision of the Internal Tax Code (IRC), all monetary gifts, including gift cards, are regarded as taxable wages.
What are de minimis fringe benefits?
De minimis benefits are small or incidental fringe benefits that employers give to their staff members but are not regarded as taxable compensation. These benefits are often thought to be of such little value that accounting for them would be administratively impractical, and as a result, they are not subject to taxation.
De minimis benefits include periodic staff meals or snacks, limited group term life insurance coverage, and occasional Christmas gifts or parties. Smaller goods like coffee, soft drinks, and even occasional tickets to cultural or sporting events are some other examples.
Is a gift card a fringe benefit?
Items given by the employer that are cash or cash equivalents are never exempt from income reporting. That includes gift cards. The payment of occasional transportation costs or meals to allow an employee to work past the regular schedule is an exception. Gift certificates that can be redeemed for common goods or have a cash equivalent value are not considered de minimis benefits and must be taxed.
Are achievement rewards taxable?
The IRS covers the topics of achievement rewards and regards them as follows:
Special rules apply to allow exclusion from employee wages of certain employee achievement awards of tangible personal property given for the length of service or safety. These awards
- Cannot be disguised as wages
- Must be awarded as part of a meaningful presentation
- Cannot be cash, cash equivalent, vacation, meals, lodging, theater or sports tickets, or securities.
Pretty straightforward, right?
How are gift cards taxed?
In the United States, gift cards given to employees are typically regarded as taxable income and as such are subject to federal income tax, Social Security tax, and Medicare tax. On top of that, there’s also the state income tax. For tax purposes, the amount of the gift card is typically included in the employee’s pay, and the employer is required to enter it as income on the W-2 form for the employee.
In a simplified way, gift cards are taxed in two ways.
- Using a percentage, withhold taxes at a flat rate of 22%.
- Adding the value of the gift card to the amount of the regular salary and deducting taxes from the total.
Patriot does a great job of explaining how gift cards are taxed and offer examples of calculations. Check out the article here.
What should you do about odd gift card amounts after tax?
So far, we established that gift cards are taxable since they are considered cash gifts or can be exchanged for cash. After the tax is deducted, the employee can be left with a weird amount of money. For example, out of the $100 gift card you offered as employee anniversary gifts, they are only left with $70.35! Not ideal, right? What you can do in this situation is to do a tax gross-up and make sure your employees will get the amount you intended to offer.
What can you offer your employees that is not taxable?
The IRS offers some other examples such as:
- Controlled, occasional employee use of the photocopier
- Group term life insurance at a face value of no more than $2,000 for a worker’s spouse or dependent
- Provision of flowers, fruit, books, etc. in special circumstances
- Personal use of a cell phone given to an employee by your employer that is mostly used for work purposes
- Occasional meal money or transportation expenses for working overtime
You should always take into account both the benefit’s frequency and value when deciding whether it qualifies as de minimis. A de minimis benefit must be unusual or sporadic in frequency for it to qualify. Also, it must not be a disguised form of payment.
A gift that keeps on giving
Gift cards are an amazing option to boost employee motivation and show your appreciation toward them. They offer the freedom of choosing what they want from a range of products and experiences. They can even be used to renew subscriptions or buy crypto! For businesses, gift cards are an operational gift since digital gift cards are easy to store, and distribute and lower internal handling costs. Huuray is a great choice for purchasing digital gift cards in bulk and delivering them globally. With international gift cards, you can gift your employees almost anywhere on the planet.
Send yourself a gift card
So, are gift cards for employees taxable after all? The answer is yes, but they are a great way to reward your employees. It’s important to consider the tax implications and offer gross-up options if necessary. The IRS also provides guidelines on de minimis benefits that are not taxable. Overall, gift cards offer flexibility and convenience for both employers and employees. With the right provider, like Huuray, you can easily purchase and distribute digital gift cards globally, making it a seamless process for everyone involved. Show your appreciation to your employees with a gift card today!
Contact a gift card expert today!
Frequently asked questions about gift card tax
In most cases, a gift card’s value is not tax-free. The value of a gift card is typically taxable income and must be disclosed on your tax return if you receive one.
States have the authority to put their own taxes and regulations on gift cards even if the federal tax laws are uniformly applied throughout the United States. In some states, gift cards may be subject to sales tax when they are purchased or redeemed. In many states, after a specified amount of time, businesses are required to turn over unclaimed property, including unused gift cards, to the state. Each state has its own escheatment laws and regulations. Moreover, although most gift cards cannot expire under the federal Credit Card Accountability, Responsibility, and Disclosure (CARD) Act, several states have additional laws that limit or forbid gift cards from having expiration dates.
Gift cards may be taxable in several situations. Gift cards may or may not be taxable depending on a number of variables, including as who gave the gift card, its use, and its value.
Here are some circumstances in which gift cards might be subject to taxes:
- As compensation or a bonus: The value of a gift card you get from your employer as payment for services provided or as a bonus is regarded as taxable income and needs to be disclosed on your W-2 form at the end of the year.
- As a business expense: The value of a gift card given as a promotional item or marketing incentive by a company to a customer or client is regarded as a business expense and may be tax deductible.
- As a prize or award: If you get a gift card as a prize or an award, you have to declare the value of the gift card as taxable income on your tax return.
Remember that the taxability of gift cards can be complicated and can change based on the particular circumstances of the gift. If you have any questions about the tax implications of giving or receiving gift cards in a specific circumstance, it’s always a good idea to speak with a tax specialist or accountant.
The IRS can track gift cards in some circumstances, yes. Gift cards are typically viewed as a type of income and, if they exceed a particular value, must be shown on the recipient’s tax return. Hence, the IRS can trace the gift card by looking at the tax return if the recipient of a gift card discloses it on their tax return.
The IRS is authorized to ask companies, financial institutions, and other sources of information in order to identify people who might be hiding income, including gift cards. As a result, if the IRS has reason to believe that an individual has received unreported income from gift cards, they may ask the gift card’s issuer for information or consult other sources in order to track the gift card and locate the beneficiary.