From employee recognition, customer loyalty, payment disbursement, and referrals – rewards are a great fit for almost every program. Whether you send rewards to an employee or a customer, you are most likely curious about how taxes will affect both you and the reward recipient. Like most items of monetary value, gift cards come with rules and regulations in the form of taxes.
The General Rule
All fringe benefits are subject to tax and must be reported in box 14 of the W-2 annual report that the employer fills out per employee.
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 only exception is when an employee receives physical products or services that have to do with assisting the employee's work, these can be considered work expenses that are not a true benefit for the employee. These gifts are known as de minimis gifts.
Examples of de minimis benefits include holiday or birthday gifts, other than cash, with a low fair market value. This also includes flowers, fruit, or similar items provided to employees under special circumstances (for example, on account of illness, a family crisis, or outstanding performance).
Since every employee is taxed according to their personal tax level, the fringe benefit amount is taxed at the same rate (when it exceeds $25 annually). Therefore, the employer can compensate the employee for the fringe benefit by calculating the employee's personal tax level.
For further reading about fringe benefits:
Here are some frequently asked questions to help start your search:
Are gift cards taxable?
Yes, gift cards are considered taxable income. This taxable income is subject to federal and state income tax withholding, unemployment tax, and FICA taxes. This includes prizes, bonuses, awards, incentives, and rewards.
Are physical gifts taxable?
Yes, physical gifts are generally considered taxable income as well. This taxable income is subject to federal and state income tax withholding, unemployment tax, and FICA taxes. However, this also includes flowers, fruit, or similar items provided to employees under special circumstances.
Are gift cards considered a "de minimis" fringe benefit if they are under a certain value?
According to the IRS, gift cards that are redeemable for general merchandise or have a cash equivalent value are not de minimis fringe benefits and are taxable. Typically, gift cards do not fall under this category.
What about gift cards sent to a customer as a “thank-you”?
Gift cards to customers, vendors, and suppliers have their own set of rules.
In general, “thank-you” gifts are deductible by a business up to $25 per person. Gift cards are typically not considered taxable income to the recipient, however, every situation is unique.
What factors determine whether a gift card is taxable?
Gift Card Amount
Gift Card Type – Is it a retail card or a cash equivalent prepaid card?
Type of Program – Employee Recognition, Rebates, Customer Loyalty, etc.
As you can see, there are many different ways to earn rewards. Whether a reward is taxable or not will depend on the situation at hand. Consult your tax advisor on specifics that apply to your company and program.