Every year, companies gift their employees all kinds of items. Some of these gifts are taxable income, and some are not. This blog post 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 in the long run. It’s important to remember that it’s always better to ask questions before deciding than after!
How are employee gifts/awards/bonuses classified?
Gifts, bonuses, parties and awards are either taxed or deductible. Under the Internal 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 the 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 might be able to deduct many of these gifts, bonuses, and awards from your taxes as business expenses. However, you must show that they were for services done for them to qualify. Look out for limits or qualifications before making the deductions.
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 towards 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 cards you give an employee are considered wages and are taxable. For instance, a gift certificate redeemable at their local retail store is not de minimis and doesn’t meet IRS guidelines for reporting. It means taxes need to pay on those purchases, just like any other income.
Related reading: What to Expect from a Tax Advisor
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 Corporation is allowed to treat bonuses as deductible expenses as long as the shareholders in the company.
- Corporations are allowed to treat bonuses as deductible expenses for employees.
- On the other hand, bonuses are not deductible for sole proprietors, partners, and LLC members (small business owners) because they are considered self-employed. Because the money the owners pay themselves is considered a draw and 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), often require careful planning. These benefits may have tax implications depending on how you want Uncle Sam to treat them!
Awards and business deductions
Taxable to employees
For employees should know that service and safety awards are not taxable if they’re limited. There is a limit on service rewards. For instance, awards are not allowable during the 1st 5 years, and you should pay once every five years.
Employee awards are deductible business expenses, whether in cash or property. However, look out for restrictions and limits.
Gifts to employees can be a tricky subject. The gift to employee tax implications for your company depends on the scenario and how much you give as gifts. But they may also come with strings attached!
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 on energy today to learn more.