Holiday Gifts May Be Taxable

With several winter holidays approaching, many businesses are making decisions about whether to give holiday gifts to their workers. Be aware that these gifts can have tax ramifications for employees.

Gifts from an employer to an employee are generally subject to both income tax and employment taxes. The value of the gift must be reported on the employee’s Form W-2 for that year. Cash and gift certificates are always taxable, said Jonathan Segal, an attorney with Duane Morris in Philadelphia.

A holiday gift may be considered de minimis and not taxable if it’s worth less than $100, and it’s occasional or infrequent. The [CA1] IRS specifically lists these examples: snacks, coffee, flowers, fruit, books, occasional tickets for entertainment events, and occasional meal money or transportation reimbursements for working overtime.

“Whether an item or service is de minimis depends on all the facts and circumstances. In addition, if a benefit is too large to be considered de minimis, the entire value of the benefit is taxable to the employee, not just the excess over a designated de minimis amount,” the IRS website states.

Holiday gifts can be nontaxable if they are in the form of a coupon for a specific item with no redeemable cash value, such as a coupon for a free ham or turkey redeemable at the local grocery store, according to Melissa Magoon, a certified public accountant with Berry Dunn in Manchester, N.H.

A holiday bonus that is given based on work performance is not a gift, and it is considered taxable wages, according to an analysis by Steward, Ingram & Cooper, an accounting firm in Raleigh, N.C.

Legal Considerations

When giving and receiving holiday gifts, a separate range of ethics rules and laws may apply to federal, state and local employees, as well as lobbyists and government contractors. For example, U.S. House ethics rules permit Congress members and their staff to accept gifts worth less than $50 and attend holiday parties with light appetizers, but not expensive, luxurious meals.

Generally, federal employees cannot give gifts to their supervisors, and they cannot accept gifts from their subordinates or other federal employees who are paid less than they are paid, according to the U.S. Office of Government Ethics. There’s an exception for gifts worth $10 or less.

To prevent lawsuits, businesses should remind workers that all holiday gifts should comply with the employer’s anti-harassment policy and should not be suggestive or sexual, such as lingerie, Segal said.

With gifts of alcohol, employers should direct workers to bring it home the same day they receive it, Segal recommended, because it’s not advisable to have bottles of booze lingering around the office until January or February.

To foster an inclusive workplace, many employers avoid religious symbolism in their holiday gifts and parties. “If an employer is providing a holiday gift, I think probably it should be something secular,” Segal said. “It shouldn’t be something religious in nature, unless it’s a religious organization.”