Can I give my employees gift cards?
It’s nice to do something nice for your employees. Gift cards seem like the perfect way to say thanks or to give a spot bonus. But unfortunately, the IRS has its own opinion about this.
Gift Cards are Taxable
In the eyes of the IRS, gift cards or gift certificates given to employees are treated the same as cash. In other words, these gifts are considered taxable income to employees, for the purpose of both payroll taxes and income taxes. Employers are generally required to withhold normal taxes from the value of the gift card and must include the value of the gift card with income on the employees’ W-2 form.
The upside of this is that since gift cards are considered compensation, they are also a deductible businessexpense, just like wages and other forms of compensation.
How to Run a Gift Card Through Payroll
So you get that it’s taxable compensation, but you still want to give an employee a gift card? Here’s how this will work on payroll.
Say you give an employee a $100 gift card. Here is how you handle the transaction in payroll:
Option 1: In your books, record $100 as a “cash advance” to the employee. Then, run an off-cycle bonus payroll. You will want to “gross up” the check so that the net is $100. Then, add a $100 “cash advance repayment” deduction to the check. The net result is that check will be a “zero dollar check.” Since you are grossing up this check, the gross pay will be closer to $140 to account for withholdings. In this case, the business will be paying both the employers and employee’s portion of the payroll taxes. plus giving some extra to the employee to cover their income tax on on the gift. Make sure you give the employee a copy of the paystub.
Option 2: This is the same as option 1, except on the employee’s next regular paycheck include a $100 bonus and a $100 deduction for the “cash advance repayment”. Your payroll software will calculate taxes on the $100 bonus. In this case, the employee will only be receiving $100 gross compensation and the payroll taxes will be split between the employer and the employee in the normal fashion.
Alternatives to Cash Gift Cards
If you want to give your employee a token of appreciation that isn’t subject to payroll or income taxes, you could consider giving a tangible item, such as a book, flowers, or a bottle of wine. As long as the value of each individual item given is less than $100, the gift will typically fall into the category of de minimis fringe benefits and, as such, will not be taxable.
The gift must also be infrequent in nature and not a form of disguised compensation. So, for instance, a gift given every time an employee signs up a new wine club member would NOT be considered a gift and would have to be included in taxable compensation.
According to the IRS, de minimis fringe benefits are minor or trivial in nature and have such a small value that it's not practical to account for them. As a result, they don't count as taxable income for your employee. You can also still write theses off as deductible business expenses.
