Tax, Payroll, Finance, Technology

You Mean Gift Cards Are Taxable?

Q. I gave all my employees gift cards this year as a holiday present.  Is that taxable?

A. Yes!  This is a never-ending debate in the payroll departments of  America.  The debate heats up each year at holiday time and any time an employer is feeling particularly generous.  The gift card was given to your employees.  This means the gift is based on the employer/employee relationship.  Each card has value and is essentially cash that is redeemable for merchandise of some kind.  Whenever cash is exchanged, it is a taxable transaction to an employee.  The argument is always that gift cards or cash under $50 in value are “de minimus” or too small to account for.  However, there is no such limit that has ever been published by the IRS.

To keep from being a “scrooge”, employers will often “gross up” the value of the cards and pay the taxes for the employees instead of taking the taxes from the gift card.  For instance, a $40 card in South Carolina, will be grossed up using the federal supplemental rate of 25% and the state supplemental rate of  7% plus Social Security/Medicare taxes of 7.65%.  So the total income hit would be $40/(1-.3965) or $66.28.  The employee would see an extra $26.28 of tax on their next check.

On the other hand, a gift to an employee of a turkey or a pen/pencil set engraved with their name would not be taxable simply because it is not exchangeable for cash and is of very low value.  If you gave all of your employees a 42 inch LCD tv valued at $1000, then you would obviously not be dealing with de minimus.  The value of the tv would need to be added to the employees’ W-2s as well.  The point at which a gift of property or physical items becomes taxable is not very clear.  Check with your legal team or tax advisor before giving out items to employees.  It pays to make sure you know the facts before going forward with something like this.

The line with gift cards though is very black and white.  Yes they are taxable income to the employee!

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4 thoughts on “You Mean Gift Cards Are Taxable?

  1. [...] Let’s say the same class of students decided to be very efficient.  Instead of donating 25 or 30 different gifts cards or cash items to a teacher, they instead collected money and donated to the school.  The school was instructed to pay this to the teacher as a lump sum.  In this scenario, the gift idea is thrown out the window.  Now the money transfers as part of an employee/employer relationship and must be considered income because the school is the employer.  The employer will either need to withhold on the payment or “gross up” the payment and pay the taxes on behalf of the employee.  This is the same as providing gift cards to teachers in lieu of cash.  I wrote about that topic in another blog article here. [...]

  2. hammerbl says:

    What if the gift cards are donated from local business to the employer and then the employer gives them to employees? Would this still be a taxable to the employee?

  3. CPA Sam says:

    The employer giving the cards to the employees is by definition taxable because of the relationship. It does not matter how the employer comes by the gift cards. If there is an employee/employer relationship, anything with value provided to an employee by an employer is taxable and should be withheld upon.

  4. patty_eitel says:

    Who comes up with this stuff? If I buy the gift it’s not taxable but if they use my money to buy it (in the form of a card), it is taxable. So, either way it’s my cash that purchased it. If I buy them a gift, they could sell it, take the cash and buy something with the cash so what is the difference? Either way, I was taxed when I bought it, they get tax added on at the store when they spend it. How many times do they need to tax us!! No need to reply. This just shows that common sense is never used when it comes to the government and taxes.

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