Why Even Modest Gifts to Employees May be Taxable

Why Even Modest Gifts to Employees May be Taxable

Employers and employees may have questions regarding Christmas gifts during the holiday season. Unlike most gifts, which usually involve tax considerations only when they are very valuable, even a modest gift between an employer and employee may be recharacterized by the IRS as compensation. Any gifts recharacterized as compensation must be included in the employee’s gross income and are subject to income tax withholding.

Generally, gross income does not include benefits provided by employers that are offered infrequently and have a low fair market value. For example, books, flowers, group picnics, dinner, event tickets, and certain holiday gifts may be low fair market value gifts. This includes gifts to employees, but also to partners in a partnership, members of limited liability companies, and shareholders in S corporations.

However, to be excluded from gross income, gifts cannot include cash or any item convertible to cash regardless of the amount. Gift cards with a cash value that is redeemable are taxable and subject to employment taxes and withholding taxes. The same tax treatment applies to season tickets to sporting or theatrical events, the use of employer-owned or leased facilities, and other gift coupons or certificates unless they don’t have a cash value and are redeemable only to get a specific tangible item.

Concerning the amount of the gift, the IRS does not provide exact guidelines. However, it has said that a $109 gift exceeds an amount that it would reasonably consider to be a “low fair market value gift” and therefore a $109 gift would be taxable. As a result, it is reasonable for employers to limit the value of holiday gifts to employees to an amount less than $100.

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