Your Guide to Year-End 2023: Gifts

While employers may hand out gifts at various times of the year, it’s common that as the holidays approach companies may want to express their appreciation for a job well done. 

Types of gifts.  In general, gifts are similar to bonuses), and are generally subject to federal income tax withholding (FITW),  FICA, and FUTA. However, if a gift has nominal value, it may be considered as a de minimis fringe benefit, and therefore will be excluded from gross income. A gift will be considered de minimis if: (1) the accounting for the item is administratively impracticable; (2) the gift is provided infrequently; and (3) the gift is furnished for the purpose of promoting health, good will, contentment, or efficiency of employees.

  • Merchandise gifts. Employers may choose to provide a merchandise gift such as a turkey or ham around the holidays. The value of such gifts would not be considered wages and are not subject to taxation. 
  • Gift certificates. Any gift certificate with a specific dollar value is considered cash equivalent and accounting for the item is not administratively impracticable, therefore taxable. 
  • Holiday gifts. Payments of a specified percentage of salary as a holiday gift are subject to employment taxes regardless if the payment is not based on the quality of the work or length of service. 
  • Holiday raffles. Employers may have random drawings awarding prizes at company holiday parties. The value of the prize is taxable to the employee.

How to record gifts. The value of gifts may be reported as imputed income one of two ways. 

  1. The value of gifts reported with regular wages. The value of gifts may be added to regular wages in a scheduled paycheck to account for the withholding of FITW, FICA, and state and/or local income taxes. 
  2. The value of gifts reported separately from wages. The value of gifts may be run separately from regular payroll and the employer can gross-up the value of the gift to cover the taxes to avoid a negative paycheck.

Let us know if you need assistance with correctly accounting for employee gifts.