With the holiday season rapidly approaching, now is the time many employers are addressing any seasonal gifts or bonuses they will be giving employees. You should be aware that the type and size of gift you give can affect both the company’s ability to deduct the cost, and the employee’s compensation liability for taxes.
Let’s look at various types of gifts, awards and bonuses to employees;
- Cash and gift cards (because may be treated like cash) – Cash and items that can be considered cash are deductible by the business and considered compensation to the employee, and therefore subject to payroll taxes and withholding. Although some tax professionals may advise that cash and cash equivalents of $25 or less are de minimis and thus not taxable, there is no guidance on this position and all cash gifts should be considered as potentially taxable.
- Tangible property gifts – Tangible property gifts are gifts other than cash or employee awards (discussed below). Tangible property gifts can include such items as holiday turkeys, clothing, adult beverages, or other physical presents. The rules are simple: the employer can only deduct $25 per employee per year. Anything in excess of that amount is not deductible by the employer.
- Employee awards – Employee awards, such as service or safety awards, are a special classification. Businesses can deduct up to $400 for awards of tangible personal property (like a watch or plaque) for each employee, each year. It is important to have a detailed plan on how awards are determined, and you must be able to demonstrate that the criteria do not favor highly compensated employees. Our office can help you determine how an award plan should be documented.
- Bonuses – Bonuses are generally deductible by the business, but are considered to be compensation for the employee, including stakeholders. It is important to make sure that holiday bonuses do not exceed the threshold of “reasonable compensation,” especially with regard to stakeholders.
Employers and HR departments should be aware of the restrictions on various gifts, awards and bonuses and how they affect both employer and employee. Gray, Gray & Gray can help with all these issues. Please contact our Tax Department at 781-407-0300 for advice in making your holiday gift selection!