Every year, companies gift their employees all kinds of items. Some of these gifts are taxable income, and some are not. This article will help you determine which is which so that your company can be compliant and pay the appropriate amount of taxes on any given gift. We’ll also go into some general best practices for gifting employees while avoiding potential problems. It’s important to remember that it’s always better to ask questions before giving a gift than after!
How are employee gifts/awards/bonuses classified?
Gifts, bonuses, parties, and awards are either taxed or deductible. Under theInternal Revenue Service (IRS) tax code, the general rule is that all forms of employee compensation are subject to income tax unless specifically excluded by the tax code. Let us look at each category.
Corporate awards, gifts, and bonuses to employees are taxable.
If the employee’s gifts/awards are taxable income, you must withhold part of the taxes. You will need to pay unemployment taxes on these amounts as it passes for compensation, like any other wages or salary liable for taxation. Ensure you report the taxable amounts on the employee’s form, a quarterly payroll tax report (IRS), and an annual tax report.
Deductible awards, gifts, and bonuses to your business
You can deduct many of these gifts, bonuses, and awards from your taxes as business expenses. However, you must show that they were for services done in order for them to qualify. Look out for limits or qualifications before making the deductions.
A corporate gift to employees and the de Minimis benefits
Most presents given by employers are taxable. However, there is some leeway concerning small tokens, which don’t count as part of an employee’s wages. These items can qualify as de Minimis—this means they won’t add up in value over time, so it doesn’t count toward taxation obligations.
The IRS has a surprising list of “de Minimis” items. These include holiday gift cards, occasional tickets for entertainment events, and flowers.
It’s important to know that cash payments, gifts, or equivalent gift cards you give an employee are considered wages and are taxable. For instance, a gift certificate redeemable at a retail store is not de Minimis and doesn’t meet IRS guidelines for reporting. It means taxes need to be paid on those purchases, just like any other income.
Bonuses for employees
Bonuses for employers/owners are a great way to show appreciation and motivate your staff. And they can also be deductible under certain circumstances. How you pay bonuses depends on the type of business that you have! Here are the different scenarios:
- S Corporations are allowed to treat bonuses as deductible expenses as long as the shareholders are in the company.
- Corporations are allowed to treat bonuses as deductible expenses for employees.
- Sole proprietors, partners, and LLC members (small business owners) cannot deduct bonuses because they are considered to be self-employed, and the money the owners pay themselves is considered a draw as they share the profits. The share is not an incentive for performance.
Bonuses are considered additional pay for services and can be deducted from your fees as long as they’re reasonable.
Bonuses are given to employees in cash or non-cash compensation, like vacation time off (VTO), which often require careful planning. These benefits may have tax implications depending on how you want the IRS to treat them!
Awards and business deductions
Employee awards are deductible business expenses, whether in cash or property. However, look out for restrictions and limits.
Final thoughts
Gifts to employees can be a tricky subject. The tax implications for your company depend on the scenario and how much you give as gifts. A good way around this issue is by consulting an expert in employee benefits. The expert will know exactly how to treat employees’ gifts, bonuses, and awards. Contact Focus Energy today to learn more.
