As the season for giving arrives, your payroll department may face a pressing question: When is a gift not a gift?
For payroll purposes, gifts are not gifts when they are compensation — and that definition encompasses all “gifts” you give to your employees. If you’re thinking “compensation” means “taxable,” in most cases you’re correct. Gifts are taxable wages to your employees, subject to income and FICA taxes, unless the items you give qualify for an exception.
What are the exceptions? The most common is small items that can be considered de minimis fringe benefits. While there’s no set dollar limit, these are generally small-ticket tangible property such as a ham or a fruit basket. The tablet or laptop you give away at the office holiday party won’t qualify. How about the meal consumed at the annual holiday celebration? One measure of de minimis is frequency. By this definition, occasional parties for employees are de minimis and nontaxable. This is the same exclusion that applies to the once-in-a-while office donut treat.
Note that cash never falls into the de minimis category. Any amount of cash or cash equivalents such as gift cards is compensation, includable on your employees’ Forms W-2.
If you need further explanation or have questions, give us a call. We’ll help you make sure your payroll returns and wage reporting statements are correct.