Gifts to employees are considered bonuses subject to tax withholding. However, true "gifts" are excludable from income. To qualify as a true gift, a transfer of property must proceed from a detached or disinterested generosity, or of affection, respect, admiration, charity, or like impulse, not made in recognition of the employee's employment.
Merchandise (Tangible Property)
If, to promote employee's good will, an employer distributes merchandise gifts (e.g., turkeys, ham, beverages) that are of nominal value, the value of such gifts is not considered wages. However, if an employer distributes cash, gift certificates, or similar items convertible to cash, the value of these gifts is considered additional wages or salary, regardless of the amount.
Merchandise Provided By Vendors
Some employers will have vendors provide substantial gifts to employees. Depending on how the gift is presented controls taxability. If the vendor provides gifts to the employer, and the employer then gives them out in a raffle or other event, these gifts must be considered non-cash wages subject to withholding. If the merchandise is awarded by the vendor directly to the employee, the gift is nontaxable.
Occasional Inexpensive Gifts
Gifts of nominal value are treated as "de minimis" fringe benefits and also may be excluded from an employee's gross income. According to the Internal Revenue Service, a gift or award is "de minimis" if:
- The value is nominal (less than $25.00);
- Accounting for the item would be administratively impractical;
- The gift is provided infrequently; and
- The gift is furnished for the purpose of promoting health, good will, contentment, or efficiency of employees.
All of the above requirements must be met for the gift to be nominal.
There are some special categories of benefits that are also considered "de minimis" fringes such as occasional meals, meal money (supper money) or local transportation fare provided on a reasonable basis because the employee has to work extra hours. Special rules also apply for employer-provided transportation furnished because it's unsafe to commute to or from work.