The holidays are fast approaching, and this year you’ve opted to get gift cards for your employees instead of fighting the crowds of shoppers to get them something they’ll probably return.
With gift cards, whoever you give them to can get what they want. Most gift cards come in denominations of $25, $50, $100, or more. However, before giving gift cards to your employees, make sure that you know the tax implications for doing so.
Are gift cards taxable?
Yes, gift cards are taxable. In the eyes of the IRS, giving your employees a gift card with a cash value is like giving them a bonus. The same goes for gift certificates for cash. The IRS doesn’t consider gift cards or gift certificates as ‘de minimis’ fringe benefits, which aren’t taxable.
What are de minimis benefits?
According to the IRS, de minimis benefits are infrequent compensation or expenses with such a small value that accounting for it is “unreasonable or impractical.” This can include items like:
snacks like bringing donuts to the office
tickets to events
meal expenses for employees working overtime
flowers given under special circumstances
personal use of a business cell phone
Although holiday gifts are considered de minimis benefits, they aren’t if the gift is in the form of a gift card with cash value. Even if the gift card's value is low, the IRS sees the gift card as supplemental wages, like commissions or a bonus, which is subject to federal and state income taxes as well as Social Security and Medicare.
The only exception is if you give your employee a gift card redeemable for a specific item of minimal value, not cash. For example, if the gift card were for a turkey or pumpkin pie, then it wouldn’t be subject to taxes.
How to add gift cards to your taxable income.
Because of the tax implications of gift cards for you and your employees, giving them may be more of a hassle than you had expected. You’ll have to add the gift card value to the employee’s W-2 form as part of their wages, tips, and compensation (Box 1).
After the IRS takes its piece of the pie, the employee gets considerably less than the gift card's original value. After taxes apply, they may only get about $70 of a $100 gift card.
Consider grossing up gift cards.
If you intend to give your employees $100 with a gift card, you could "gross up" the gift card amount to ensure that they walk away with the full $100. Grossing up means you increase the value of the gift card to account for the taxes that will be taken from it.
So, if the gift card is subject to about 30 percent in taxes, you would give your employee a gift card valued at $143, leaving them with about $100 after taxes.