IRS Rules on Employee Gifts

by Cam Merritt; Updated September 26, 2017
woman receiving a gift

As far as the Internal Revenue Service is concerned, there's really no such thing as a "gift" from an employer to an employee. Anything of value an employer gives to its workers is considered compensation. As a result, items presented as gifts may actually be taxable income to the employee. It is the employer's responsibility to report the value of that gift on the employees' W-2 forms and, if necessary, withhold the necessary taxes.

Gifts and Employment

Although there is a federal gift tax, it doesn't apply to most gifts. When it does apply, it's the gift giver, not the recipient, who is responsible for paying it. However, the tax code does not even recognize "gifts" from employers to employees. If it did, employers could eliminate a significant portion of their tax responsibilities simply by reclassifying their workers' wages as gifts.

Fringe Benefits

The IRS considers all gifts from an employer to be fringe benefits. All fringe benefits are taxable unless the law provides an exemption for them. Many of the most common and valuable fringe benefits are indeed exempt, including health insurance, tuition aid, employee discounts, child care subsidies and transportation assistance. Gifts to employees, however, are exempt only when they qualify as "achievement awards" and when they are "de minimis fringe benefits."

Achievement Awards

An achievement award is an item of "tangible personal property" given to employees as either a safety award or to honor length of service. "Tangible personal property" means an actual physical object. A gold watch for 20 years' service, for example, fits the definition. Things like cash, gift certificates, meals and shares of stock do not. As of 2015, an achievement award had to be less than $1,600. Anything more than that is taxable income to the employee.

De Minimis Benefits

A de minimis fringe benefit is something of such small value that it isn't feasible for the employer to account for it separately for each worker. A company that provides free doughnuts each morning, for example, isn't expected to monitor how many doughnuts each worker takes. Other examples include birthday cakes or flowers on special occasions, food and drinks at office parties or occasional tickets to sporting events or the theater. However, cash and cash equivalents, such as gift certificates or gift cards, are never considered de minimis. They are always taxable income to the employee.

About the Author

Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.

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