The Los Angeles Times reports that more businesses are handing out bonuses and gifts to employees this year than last year. That's great if you are thinking about this, but first consider the tax implications. Bonuses are always taxable to employees, because they are part of pay, but what about gifts?
Gifts to Employees - Tax Implications:
- Small gifts, like turkeys, wine, or flowers are generally considered nontaxable de minimus fringe benefits (with low value, given infrequently).
- Gift certificates are considered like cash and are taxable wages, and must be withheld like other to all employment taxes. Gift certificates in small amounts is taxable to the employee. So the gift of a turkey is not taxable, but a gift certificate for a turkey is taxable.
- Occasional holiday parties are not taxable to employees and their families, as long as they are infrequent. The cost of the party is a deductible business expense for you as an employer. Parties are not subject to the 50% limit on business meals.
Withholding and Employee Gifts
If a gift is taxable to an employee, you must:
- Withhold amounts for federal and state income tax and for FICA (Social Security/Medicare) taxes, just as you would for that employee for pay purposes
- Pay the employer's portion of the FICA tax for that amount, and
- Report the amounts along with other taxable employee income, on your quarterly report (Form 941).
Kind of takes the fun out of gifts to employees, doesn't it?
Some companies that give gift certificates give a larger amount and take the tax out of employee wages. For example, a company that used to give a $40 value gift certificate now gives a $50 certificate, but takes the difference out of employee paychecks in taxes.
None of this tax talk should dampen your holiday spirit. If you want to say "thank you" to employees over the holidays and throw a party or give gifts, you can still do those things. Just be aware of the tax implications.