Cash gifts, retailer gift cards, and some gift certificates used as employee gifts must be reported by your employee as taxable income. In contrast, our gift certificates are exempt from this requirement under the IRS de minimis fringe benefit rule, are not considered taxable income, do not need to be processed through payroll, and may be deducted as a non-wage business expense by the employer.
To qualify for the de minimis exclusion the following criteria must be met:
- The gift must be of nominal value. There is no set dollar limit, but the IRS has ruled in one particular case that a gift over $100 must be treated as taxable income.
- The gift must be infrequently given. Holiday employee gifts are specifically mentioned, as are turkeys, hams, and gift certificates for a specific item (such as ours).
- The gift may not be cash or a cash equivalent under the de minimis rules.
- Accounting for the employee gifts must be administratively impractical or unreasonable.
The last three of these points distinguish our turkey and ham gift certificates from retailer gift cards and many other gift certificates:
Gift certificates for a specific item: The IRS states that “A certificate that allows an employee to receive a specific item of personal property that is minimal in value, provided infrequently, and is administratively impractical to account for, may be excludable as a de minimis benefit, depending on facts and circumstances.” Our certificates fit this description perfectly, while retailer gift cards and many other gift certificates do not.
Cash equivalents: Cash gifts are never de minimis as employee gifts and are always considered taxable wages regardless of the amount. Gift cards and gift certificates that are easily converted to cash, allow cash back, and/or are redeemable for general merchandise are cash equivalents, are not de minimis and are taxable. Therefore retailer gift cards, credit cards, or gift certificates that are good for a variety of merchandise are taxable, as are those with set dollar values with a cash back option. However, gift certificates (such as ours) that are good only for a specific item and do not offer a cash back option qualify for the de minimis exclusion for employee gifts.
Accounting for the gift is impractical: Unlike gift certificates or coupons with consistent pre-set dollar values, our gift certificates all have variable values. They are good for a turkey or ham up to a designated limit, and will be redeemed for the actual value of the item the consumer selects in the supermarket. This will vary with each transaction. It would be unreasonable, if not impossible, to account for the redemption value of each certificate as described in the de minimis rules for employee gifts.
Because of tax disadvantages as well as lower ROI, employee gifts of cash and cash equivalents like retailer gift cards or gift certificates with set dollar values and cash back options should be avoided as employee gifts. Instead, offer gift certificates good for only one type of item of moderate value. These will be more appreciated, will generate higher employee goodwill, loyalty, and productivity, and may offer significant tax advantages under the IRS de minimis exclusion.
IRS publications referenced in this article:
- Online IRS article “De Minimis Fringe Benefits”, last reviewed or updated August 3, 2012 — Provides a summary explanation of de minimis fringe benefits, mentions holiday employee gifts as an example, and includes this quote: “Gift certificates that are redeemable for general merchandise or have a cash equivalent value are not de minimis benefits and are taxable…A certificate that allows an employee to receive a specific item of personal property that is minimal in value, provided infrequently, and is administratively impractical to account for, may be excludable as a de minimis benefit, depending on facts and circumstances.” This article may be accessed at http://www.irs.gov/Government-Entities/Federal,-State-&-Local-Governments/De-Minimis-Fringe-Benefits
- Publication 525, Taxable and Non Taxable Income, p. 5 — “Holiday gifts. 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. However, if your employer gives you cash, a gift certificate or a similar item that you easily can exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved.” (Note the qualifier “that you easily can exchange for cash”, which does not include our certificates which never can be exchanged for cash.)
- Publication 15-B, Employer’s Tax Guide to Fringe Benefits, p. 8 — Includes a discussion of de minimis fringe benefits, and describes retailer gift cards, charge cards, and credit cards as never qualifying for the de minimis exclusion regardless of the amount.
- Publication 535, Business Expenses, p. 7 — “Gifts of nominal value. If, to promote employee goodwill, you distribute food or merchandise of nominal value to your employees at holidays, you can deduct the cost of these items as a nonwage business expense.”
Disclaimer: We offer the above only as our opinion, not as expert legal or accounting advice. Please consult your attorney and accounting professionals for counsel relative to applying the IRS de minimis rule to the specific circumstances of your employee gifts.
©2018 PFR Corporate Gifts, LLC May be reprinted unedited in whole with proper credit given.
For other articles related to employees, gifts go to our “Best Practices” section.
PFR Corporate Gifts, LLC
1469 North 1200 West
Orem, UT 84057
Gift certificates for turkey or ham as employee gifts that may qualify for the de minimis exclusion.