Whether you’re sending rewards to an employee or a client, the common question is the same: how do taxes affect you and the person receiving the reward? Like most things of monetary value, gift cards come with tax rules. Here’s a plain-language overview.

The General Rule

All fringe benefits are taxable and must be reported in box 14 of the employee's annual W-2.

The report must include the gross amount of all the benefits (including physical gifts and e-gifts) the employee received by employee name and SSN. The yearly cumulative limit for gifting without reporting is $25. This means that, even if one benefit doesn't exceed the limit, if the annual accumulation is higher than $25, it must be reported and taxed.

The report includes the gross value of all benefits an employee received — physical gifts and e-gifts — listed by employee name and SSN. Even if a single gift is small, what matters is the annual total: once the cumulative amount for the year passes the threshold of $25, it must be reported and taxed.

The main exception is the de minimis benefit — a low-value item that's impractical to track. Examples include:

• Physical products or services that help an employee do their work, which can count as work expenses rather than a true benefit

• Holiday or birthday gifts (other than cash) of low fair-market value

• Items like flowers or fruit given under special circumstances, such as illness, a family crisis, or outstanding performance

Because each employee is taxed at their own rate, the taxable benefit is taxed at that same rate (when it exceeds $25 annually). Some employers choose to “gross up” — compensating the employee for the tax so the reward’s full value lands in their pocket.

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For more detail, see the IRS guide to fringe benefits (Publication 15-B):

irs.gov/pub/irs-pdf/p15b.pdf

Frequently asked questions:

Are gift cards taxable?

Yes — gift cards are treated as taxable income, subject to federal and state income tax withholding, unemployment tax, and FICA. This applies to prizes, bonuses, awards, incentives, and rewards.

Are physical gifts taxable?

Yes — physical gifts are usually taxable income too, subject to the same federal and state income tax withholding, unemployment tax, and FICA taxes, with limited exceptions like the de minimis items noted above.

Can a gift card be a “de minimis” benefit if it’s under a certain value?

Usually not. Per the IRS, gift cards that are redeemable for general merchandise or have a cash-equivalent value are not de minimis benefits — they’re taxable. Most gift cards fall into this category.

What about a gift card sent to a customer as a thank-you?

Gifts to customers, vendors, and suppliers follow their own rules. In general, a business can deduct thank-you gifts up to $25 per person per year. Gift cards to customers usually aren’t taxable income to the recipient — but every situation is different.

What factors determine whether a gift card is taxable?

• The amount.

• The type — a retail-specific card vs. a cash-equivalent prepaid card.

• The program — employee recognition, rebates, customer loyalty, and so on.

There are many ways to earn rewards, and whether one is taxable depends on the situation. Always check with your tax advisor about what applies to your company and program.

Want to learn more?

Explore all our gift card options by setting up a free Gifted account here, or reach out to us anytime.

Questions? Email us at support@gifted.co.

A quick but important note

This article is general information, not tax advice. Tax rules are detailed and change, and your situation may differ. Please confirm specifics with a qualified tax professional before relying on anything here.

This article is specifically relevant for gifting admins.