Between office parties, “white elephant” gift exchange games, and presents and/or bonuses from employers, it can be easy to forget about the tax implications of these holiday traditions. Fortunately, the IRS is pretty lenient when it comes to holiday gifts and parties. As long as you do not break certain rules you probably will not have to worry about running into problems come tax season.
Seasonal Presents for Employees
As the holiday season swings into full force, it has become very common for employers to give out presents to their employees. For the most part, employees will not have to worry about claiming the value of these gifts on their tax returns unless it is a cash bonus. Additionally, employers can write off these expenses if they meet certain restrictions.
The Intent of Giving
In the case of Duberstein v. United States, the Supreme Court determined that the common law understanding of the term "gift," is different than the business tax related definition. The court found that some gifts given by employers were often intended to reward past performances or serve as incentives for future performance. In order to be excluded from payroll taxes a gift given by an employer must be made generously with "respect, admiration, charity or like impulses."
De Minimis Fringe Benefits
According to the Internal Revenue Code Section 132(e)(1), a de minimis fringe benefit is "any property or service the value of which is so small as to make accounting for it unreasonable or administratively impracticable after taking into account the frequency with which similar fringes are provided by the employer to the employer's employees." In plain english, a de minimis benefit is a gift given by an employer that is not subject to payroll taxes and is a deductible business expense.
Turkey, Ham, or Gift Basket Rule
You may have heard of the turkey, ham, or gift basket rule when it comes to taxes on employer provided presents. Essentially, non-cash holiday gifts of property given to an employee will not need to be considered part of an employees wages and will therefore not be subject to payroll taxes. The Federal tax code even allow for items such as flowers, books, gift baskets, etc. to be given to employees. The IRS asserts however, that these gifts must be of a "low fair market value," but does not provide any clear rules on what that monetary limit is.
Occasional Parties & Event Tickets
De minimis also allows for employers to deduct the cost of occasional office parties and event tickets for employees. These parties can include holiday celebrations, picnics with employees and their guests, birthday parties, etc. The IRS also allows for occasional theater or sporting events tickets to be given out without being subject to payroll taxes.
Easily Exchangeable for Cash
According to the Internal Revenue Code all gifts of cash, or items that are "easily exchangeable for cash" must be considered part of the employers income and they will be subject to payroll taxes. These include any items that could be exchanged for cash, such as stocks, and are not generally tax savvy for a business owner or an employee. Employers will have to pay additional payroll taxes on the gifts, and employees will have to report them on their tax return.