Every year around the holidays, generous, well-meaning companies throw parties for their employees and give generous gifts, ranging from turkeys to gift cards to cash to trips to Hawaii. What employee doesn’t want a gift from their employer? The answer to this question is: An employee who has to pay for it later.
Years ago I worked for a generous company who provided each employee with the gift of a company-paid, hour long massage each month, worth about $75 each at the time. It was heaven! We all became quickly accustomed to receiving the massages. At the end of that first year of massages, we got a new accountant who determined that these massages were, in fact, taxable income according to the IRS. On the last paycheck of the year, we each had $900 of income in fringe benefits added, deducted as a fringe benefit already received and taxed. Because it was a large chunk of income, the difference in taxes from a regular paycheck was quite noticeable, lowering the take home pay on that check for many employees. Grumblings and complaints could be heard far and wide that holiday season, and a gift that was meant to improve morale, actually damaged morale for a time.
So what about that $25 gift card to Starbucks? Or the $50 cash handed out at the Christmas dinner? Commonly, companies believe that there is a limit that the IRS has for taxable income, that if you stay below that value with your gift, you don’t have to include it as income for your employees. Unfortunately, no such limit exists. The IRS considers all gifts to employees that are cash, gift certificates, or items “easily exchanged for cash” as part of each employee’s taxable income, requires companies to run those gifts through payroll accordingly, and withhold taxes appropriately.
But when it comes to turkeys and hams, the IRS specifically calls them out in Publication 525: “If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, do not include the value of the gift in your income.” Just remember that “nominal” means minimal. Other items not included in taxable income are: discounts the company may offer or company events, such as picnics.
As an employer, be clear with your employees about the taxable nature of the gift they are receiving. If an employee is expecting those extra taxes to be taken out, they are less likely to complain about it when it happens. Understand that while an employee may really appreciate the flat screen tv they won at the company party, they may not be excited about having their take home pay reduced by the taxes for that tv.
Questions about taxable income for your employees? Questions about how to communicate your policy to your employees? Call Cascade. We can help. For help with your turkey, you should probably stick with the Butterball hotline.