Reporting rules: What you need to know about the gift of gift cards
Nov. 5, 2020
This paid piece is sponsored by Eide Bailly LLP.
It’s the holiday season, and many people are already out shopping for the perfect gift. Gift cards or e-gift cards can be a great way for both businesses and individuals to show appreciation. However, if your organization gives gift cards to staff, there are steps you must follow to ensure you’re compliant with IRS rules.
Gift cards given to employees count as taxable income and must be reported on Form W-2, but people often incorrectly assume that gift cards are covered under de minimis fringe benefit rules.
What are de minimis fringe benefits?
A de minimis fringe benefit is defined as “one for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical.” In other words, a fringe benefit is something so minor that the IRS is not concerned about reporting.
Unfortunately, gift cards are another story. According to the IRS, since cash and cash-equivalent fringe benefits like gift certificates have a readily ascertainable value, they do not constitute de minimis fringe benefits. This means that businesses must report gift cards as part of an employee’s wages on a W-2. Furthermore, if the employee is covered for Social Security and Medicare, the value of benefits also is subject to withholding for these taxes.
How are non-taxable gifts determined?
Awards and gifts of minimal value — like a holiday turkey, for example — generally fall under the de minimis rule and are not taxable. It can be hard to determine what exactly is considered minimal, though, since the IRS has never put a specific dollar amount on the de minimis fringe benefit. However, it has provided some examples. Commonly encountered fringe benefits include:
- Occasional personal use of an employer’s copying machine — as long as you have restrictions in place, so 85 percent of the use is for business purposes.
- Occasional group meals, picnics or cocktail parties for employees and their guest.
- Occasional theater or sporting event tickets.
- Flowers, fruit, books or similar property for employees under special circumstances — otherwise known as occasionally — for instance, on account of illness, outstanding performance, etc.
The common thread in the above examples is frequency. Frequency is a huge deal when it comes to de minimis fringe benefits and what does and does not need to be reported. When it comes to gift cards, however, the requirements are clear: Regardless of size or frequency, gift cards must be reported as part of your employees’ wages. For additional information on fringe benefits rules and exclusions, see IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits.
Reporting: The gift that keeps on giving
Giving gifts to your employees is a nice gesture, but it’s important to make sure you’re reporting them correctly, or you could wind up with worse than a lump of coal as a result. Understanding what is and isn’t taxable income is vital to your organization’s success, both at year-end and beyond.
