What’ll it be this year, a holiday ham for your employees or a holiday gift coupon for a comparable amount? It would seem reasonable to view these presents as more or less the same, at least for tax purposes. But, as we’ll explain, the IRS said otherwise in a recent decision.
Employer Switched from Food Gifts to Gift Coupons
The IRS ruling was made in the case of an employer who traditionally gave employees a ham, turkey, or gift basket as an annual holiday gift. The employer switched to $35 gift coupons after some employees with religious and other dietary restrictions requested the change. The employer also thought the move would reduce delivery costs and eliminate the potential risks involved in giving perishable food to employees.
The $35 gift coupons were redeemable at area food stores, with certain restrictions—they could not be used to buy tobacco products, alcohol, or pharmacy goods. For the two years the employer gave the gift coupons, it did not treat them as income and did not withhold or pay employment taxes on them.
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IRS Says Gift Coupons Are Income
But the IRS concluded that the gift certificates were indeed income and should have been treated that way. The federal tax code says that gross income includes income from any source, including fringe benefits. Another provision excludes “de minimus” fringe benefits from gross income, meaning something that’s so small that accounting for it would be unreasonable or administratively impractical. The food gifts the employer gave in the past fell into this category, but the gift coupons did not, ruled the IRS.
Cash, Gift Certificates Treated Differently Than Goods
Cash is never a de minimus fringe benefit, and cash equivalents such as gift certificates and gift cards generally aren’t either, said the IRS. This is true even if the same item or service given directly would qualify as de minimus. For example, while a holiday turkey would be considered de minimus, cash or a gift certificate given to an employee to purchase a turkey would not be.
The IRS said that because cash and cash equivalents have an easily determined value, they are not administratively difficult or impractical to account for and must be factored into an employee’s income, even if the dollar amount is small. Accordingly, the $35 should have been included when the employer calculated employees’ gross income and tax withholding.
Staying Out of Trouble
This IRS ruling is not binding law, but it indicates how the IRS would probably rule in similar cases—so you’d be wise to take it into account when planning your holiday gift giving. If you give employees cash or a cash equivalent this holiday season, remember that it may be considered part of employees’ income and subject to employment taxes.