Taxes on Employee Gifts

IRS rules regarding taxes applicable to employee gifts have been subject to numerous changes since the 1980s. In most cases, employees receiving gifts have endured more taxation, while employers enjoy greater tax deductibililty, along with more detailed bookkeeping and recording issues. Learning the technical difference between "tangible" and "intangible" employee gifts helps you understand many of the tax consequences. IRS definitions of these terms, however, initially can be a bit confusing to business owners and managers.

Intangible Gifts

For reasons known to the IRS, but few others, cash is the most prominent intangible employee gift subject to taxation. Employers can deduct a maximum of $25 as a gift, while the remainder must be included -- and taxed -- as employee compensation. While compensation is a deductible operating expense, employers must also pay additional payroll taxes on these gifts. Employees also pay more taxes since cash gifts over $25 are recorded as compensation, subject to local and federal withholding taxes.

Tangible Gifts

These employee gifts include holiday turkeys, adult beverages or other physical presents or gift items. Employers can still only deduct a maximum of $25, but employees need not report these gifts in their tax returns. The logic: The IRS treats these as "indirect" rewards, since others can use turkeys, bottles of wine or other items besides the employee. Tangible gifts are not treated as compensation, so neither withholding nor eventual income tax is due from either employee or employer.

Employee Awards

Tax issues with employee awards, like engraved plaques, are more complex. While not treated as employee compensation, the IRS permits employers to deduct up to $1,600 per employee per year for the cost of company awards or trophies. However, the IRS has a "maximum average" of $400 per award gift item. For example, a company with a top superstar employee who wins seven separate awards in a year, costing a total of $3,000, can still only deduct $1,600 of the gift cost for that employee. Employers giving "awards" of gift certificates or gift cards, however, are subject to the intangible gift, or cash, taxation rules.

Tickets to Sporting Events or Shows

Confused yet? It gets better. Many employers reward employees with tickets to sporting events or popular concerts, plays and shows. The IRS considers these intangible gifts, like cash, but has separate treatment rules. While the employee has no tax liability, the employer must treat the cost as an entertainment expense if the employer also attends the event; if the employer does not go with the employee, he can classify it as a gift or entertainment expense. Employers should ask their tax adviser to decipher this confusing employee gift regulation.