It’s the holiday season, which means a time of giving. This is the time of year when many employers recognize employees for their hard work and accomplishments. Employers may give employees a small holiday gift to thank them for their work this past year or may give an achievement award for years of service. Depending on the type of gift, there are tax consequences to both the employer and employee.
Gifts can be deducted as a business expense to the employer up to the IRS limits. A business can deduct gifts of no more than $25 to any one person each year. Any gift amount that exceeds $25 per person is a nondeductible expense. This includes gifts to both clients and employees.
As for the employee, gifts received from an employer may or may not be taxable. If the gift received is a de minimis benefit, meaning the value and frequency which is provided is very small, making the accounting for it unreasonable or impractical, then this gift can be excluded from income. To be a de minimis benefit, the gift should be occasional or unusual in frequency and whether a gift is de minimis depends on all the facts and circumstances. The IRS has ruled previously that items with a value exceeding $100 could not be considered de minimis and therefore must be included in income. If a gift is too large to be considered de minimis, the full value of the benefit is taxable to the employee, not just the amount exceeding the designated de minimis amount. Cash or cash equivalent gifts cannot be a de minimis benefit and consequently are never excludable from income. These gifts should be included in the employees’ wages. If an employer gives a gift certificate that allows an employee to receive a specific item of personal property that is minimal in value, it may be excludable as a de minimis benefit, depending on facts and circumstances.
As the year is coming to an end, many businesses will recognize their employees with an achievement award. An achievement award is an item of tangible personal property that meets certain requirements. These awards must be made as part of a meaningful presentation, be given to an employee for length of service or safety achievement, and cannot be a form of disguised pay. Achievement awards cannot be cash, cash equivalent, vacation, meals, theater or sporting tickets, or securities.
There are deduction limits to businesses for achievement awards. Businesses can generally deduct amounts given to employees whether paid in cash or property. If property is given to an employee as an achievement award, the business deduction may be limited. A business can deduct the cost of the awards given to any one employee during the year limited to $400 for awards made under nonqualified plans and $1,600 in total for awards made under both qualified and nonqualified plans. Under a qualified plan, an achievement award is given as part of a written plan that doesn’t favor highly compensated employees. An award is not a qualified plan award if the average cost of all the employee achievement awards given during the tax year is more than $400. The employee receiving the award, can exclude from income the same dollar limitation amounts as the business deduction limitation. Generally, if an award is taxable to the employee, the award is valued at its fair market value. The taxable amount depends on whether the award was made under a qualified plan, whether the cost of the award to the employer exceeds dollar limitations, and the fair market value of the award.
If employee gifts and awards qualify for the exclusions above, no reporting is necessary. However, if they are taxable, they should be included in wages on the employee’s Form W-2 and subject to income tax withholding.