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Gifts to Employees: Are They Taxable?

The holidays are prime time for gift giving but many employers are unaware of how rewarding their employees with gifts or bonuses impacts their taxes at the end of the year. The fact is that gifts of any kind will have some kind of impact on any business from a taxation perspective.

If you’re going to give a holiday gift or bonus, be sure to factor in the whole cost of giving. If needed, let employees know about the tax responsibility that gifts or bonuses will incur in order to avoid the big surprise when the additional taxes kick in. A wise move would be to offer a gift that avoids taxation.

From a financial standpoint, holiday giving is a great way to end the year due to the deductions that small business owners can claim for every gift given. Holiday bonuses or gift cards are a traditional way to show employees gratitude for the work they do throughout the year. Monetary gifts are quick, easy, and always appreciated. The caveat is that they are considered taxable income. Even when the gift is non-monetary, like a vacation or large screen TV, it is usually treated as taxable compensation. This means that both the employer and the employee take a hit with taxes and FICA withholdings.

So how can you determine if a gift is taxable income or a non-taxable item? As a rule of thumb, food items like a holiday ham or turkey doesn’t need to be included as part of the employee's income. and therefore isn’t a taxable item. Additionally, gifts in recognition of long service or safety achievements may be untaxable provided they are valued at less than $1600 and are not cash or points redeemable for cash. However, cash, a gift certificate, or a similar item that you can easily exchange for cash, has to be included as extra salary or wages (regardless of the amount) and thus is taxable.

Non-taxable gifts also benefit the employer by reducing tax liability for the business. While most types of gifts are a deductible business expense, it is important to examine all gift ideas from a tax standpoint to minimize tax payments as much as possible.

Do the holidays have you in the giving spirit? Give Fusion CPA a call today to have our tax experts help you gift the smart way.

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This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided in this website is not all inclusive and such information should not be relied upon as being all inclusive.