Want to show your employees you appreciate their hard work throughout the year? You might decide to distribute gift cards to your employees. But before you start doling them out, you need to know …. Are gift cards taxable?
First, the technical stuff
This IRS has rules on employee gifts and benefits, like gift cards. A gift card, or gift certificate, is a type of fringe benefit. Fringe benefits are benefits you can give employees in addition to their regular wages.
A fringe benefit can be taxable or nontaxable, depending on what it is. Taxable fringe benefits are subject to federal taxes:
Income Social Security Medicare Federal unemployment (FUTA)
Nontaxable fringe benefits may be excluded from one, some, or all types of taxes. Some nontaxable fringe benefits are classified as de minimis fringe benefits.
A de minimis fringe benefit is an item with low value that you give to employees infrequently. Don’t withhold taxes from or account for de minimis benefits. Some examples of de minimis benefits include fruit baskets, holiday hams, and company parties.
Keep in mind that cash is never considered a de minimis fringe benefit. Cash is considered a supplemental wage (e.g., bonus). If you want to give an employee cash, you need to withhold taxes and record it.
So, which is it? Are gift cards taxable income, like cash, or are they de minimis fringe benefits, like fruit baskets?
Are gift cards taxable?
Yes, gift cards are taxable. According to the IRS, gift cards for employees are considered cash equivalent items. Like cash, you must include gift cards in an employee’s taxable income—regardless of how little the gift card value is.
But, there is an exception. You might be able to exclude gift cards you give employees for a specific item of minimal value (e.g., a ham). Check with a tax professional if you have questions about whether you need to withhold taxes on gift cards.
For all other gift cards, record the value and pay the appropriate amount of taxes.
Now that you know gift cards are taxable, you can avoid making the mistake of giving them to employees without first withholding taxes. Worried about making other payroll errors? Check out our FREE whitepaper, “10 Common Payroll Mistakes You Don’t Want to Make,” to help you stay compliant. How are gift cards taxed?
A gift card is a type of supplemental wage. So, you need to withhold taxes on gift cards the same way as any other supplemental pay.
Withhold federal income, Social Security, and Medicare taxes from an employee’s gift card amount. If applicable, you may need to withhold state income tax.
You can withhold federal income taxes on supplemental wages—aka gift cards—in one of two ways:
Percentage method: Withhold a flat rate of 22% for taxes Aggregate method: Add gift card amount to regular wages and withhold taxes on the combined amount
Like federal income tax, many states also have their own supplemental withholding tax rate for state income tax. Withhold Social Security tax (6.2%) and Medicare tax (1.45%) like normal.
Taxing those gift cards: Example
Let’s say you wanted to give an employee a $100 gift card for the holidays. You decide to use the percentage method for federal income tax.
Follow these steps to determine how much to withholdContinue reading