Your employees are important to your business, and gifts help you make them feel valued and appreciated. But whether it's holiday gifts, seasonal bonuses, or just demonstrations of your goodwill, how can you give employee gifts that will save money in taxes for both you and your employees? Here are a few ways to make it work for everyone.
De Minimis Fringe
There's a category of employee benefits that's too small to be logical for lengthy record keeping or reporting. This category is generally called de minimis (Latin for "of trifles") fringe benefits. For today's employers, the IRS considers occasional, incidental, and small-value gifts as being too trivial to worry about.
This could include things like occasional event tickets, average-value holiday gifts, office snacks, meals for the convenience of the employer, or flowers on special occasions.
While de minimis fringe benefits cover other benefits throughout the year, these categories help you avoid giving annual gifts that will incur taxes for anyone. It allows you to offer holiday activities such as parties, meals, and office desserts without worrying about tax issues.
Even if a gift doesn't fall under the de minimis label, it may still be deductible to your company and nontaxable for the employee. Generally, if you keep employee gifts - including cash, turkeys, and gift cards - under $25, they are deductible by the employer as an expense. This amount doesn't need to be included in taxable income either.
Annual awards are a slightly different category for IRS purposes. The good news is that service awards and safety awards come with increased deductibility limits as long as they are equally applied and no one is given preference over other employees for non-relevant reasons (such as higher pay or officer status).
In this case, you can give awards worth up to $400 to individuals for things like length of service or safe behavior without taxation. You may also offer other recognition awards up to $75.
Keep in mind that to qualify for this deductible expense, the gifts cannot be what's known as a cash equivalent, such as gift cards or securities. It also cannot be a vacation, paid meals, or theater and sports tickets. These types of gifts are considered wages in disguise, so they have to be reported.
What do you do if you want to give employees more than these amounts, cash, or cash equivalents? Since larger gifts must generally be included as taxable income for employees, there is a good solution - it's called grossing up. Grossing up is raising the amount of an award to account for the increased taxes the receiver will have to pay.
If you want to give $1,000 as a bonus, for instance, your employee might incur an extra $200 in taxes for the reportable income. To offset this, you may boost the initial bonus to $1,250 so that the added taxes don't reduce the value of that bonus in the employee's pocket.
While this may cost you as the employer a little more, it shows concern for the employee and generates goodwill along with conveying the true worth of the bonus you intended end up in the employee's wallet.
What special activities and gifts are you thinking about as the year end approaches? For help determining the taxability and deductibility of specific gift choices, work with an experienced accountant before making your decisions.
At Wright, Ward, Hatten & Guel, PLLC, we can aid you in finding gifts your workers will love and that won't cost anyone more than they have to. Make an appointment to talk with an expert today.