With the holidays quickly approaching you may be considering how to show your employees a sign of appreciation by giving them gifts or throwing them a holiday work party this season.
It is important to know how your holiday gift expenses affect you and your business during tax season. That’s why the certified public accountants at Steward Ingram & Cooper PLLC have compiled all the information you need to know about the tax-deductible status of employee gifts.
What Are Tax Deductible Holiday Gifts for Employees?
As a business owner, you see first-hand how hard your staff works throughout the year. It’s only natural that when Thanksgiving, Christmas, Hanukkah, or other holidays your employees might celebrate come around you want to show gratitude by presenting those employees with holiday gifts. Before spending a ton of cash on your well-deserved employees or throwing a huge holiday bash in the office, it’s important to review the tax rules associated with employee gift-giving.
In simple terms, the IRS defines a gift as anything of value transferred from one person or entity to another without receiving anything of equal or greater value in return. As you know when you meet with your CPA for tax planning each year, nothing is quite as simple as it seems when it comes to your taxes.
What makes employee gifts tax deductible? Let’s look at the types of gifts you may give to employees and discuss whether or not they are tax-deductible for your business.
Cash Gifts and Gift Certificates
If you give a holiday gift to an employee in the form of cash or a cash equivalent like a gift card or gift certificate, this is taxable income and should be included in the employee’s W-2, and your business will receive a deduction for this.
De Minimis Fringe Benefits
Employee gifts that are not cash or cash equivalents that are valued at $100 or less per employee are considered “de minimis.” De Minimis means that the gift is categorized as trivial or of little importance. The amounts spent per employee on gifts as well as the frequency in which gifts are given are so insignificant that it is not considered taxable, and therefore are deductible to your business at tax time.
According to the IRS, examples of de minimis employee holiday gifts are:
- Gift baskets
- Turkey, ham, or other food items.
- Sports, concert, theater, or entertainment tickets
- Holiday ornaments
- Other types of merchandise.
Although the IRS does not state explicitly that amounts exceeding $100 would not be considered de minimis, it is a general rule that businesses follow– the true nature of something being de minimis is that the holiday gift is given INFREQUENTLY and in LOW AMOUNTS, otherwise it would be subject to regular income taxes.
During the holiday season, many employers enjoy operating raffles that provide merchandise or gift cards to their staff. These are randomly presented prizes that are not the result of work performance or achievement, and follow the same cash versus non-cash rules for employee gifts outlined above.
Holiday parties for your employees are fully tax deductible and not reported as income. The work party must be inclusive of all employees, meaning no one who works for you is excluded from being invited to the holiday gathering. Additionally, holiday parties should not be lavish or extravagant– they should be practical and include food and beverage basics.
Work parties during the holiday season are a great way to show gratitude and appreciation for your employees while benefiting from their tax deduction status. If you are looking to throw a 100% tax-deductible holiday party for your employees, consult your local CPA professionals with any questions you have about keeping your work party within the rules outlined by the IRS.
Are Holiday Bonuses Considered Gifts?
A holiday bonus that is given based on achievement and work performance is not a gift, it is considered regular, taxable wages and subject to the same income tax reported on the employee’s W-2 form.
Sometimes, an employer will give a bonus to an employee, not based on performance but simply based on gratitude at the sole discretion of the employer. These bonus “gifts” are subject to the same cash rules as any other gifts.
Are Gifts for Customers and Clients Tax Deductible?
As a business owner, you may be moved to give a holiday gift of some kind to loyal customers or highly-valued clients. To be tax-deductible, customer gifts of cash or cash equivalents as well as merchandise gifts cannot exceed $25 per customer, per year.
If you want to include your business’s logo in the form of engraving, that cost is not a part of your $25 limit, nor is the cost of packaging and mailing to clients.
Contact a Local CPA to Plan Your Tax Deductible Holiday Gifts
Are you a business owner who wants to make sure that your employee holiday gifts are deductible come tax time?
Our Raleigh CPAs at Steward Ingram & Cooper PLLC are here to help guide you through gift planning for employees and throwing workspace holiday parties so the money you spend this winter is tax deductible next year.
Contact us at (919) 872-0866 to learn more about our tax services or fill out the form below.
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