How to Tax Employee Gifts
- 1). Figure out which gifts are taxable and which are not. The IRS narrowly defines this category. See the IRS Taxable Fringe Benefit Guide for items subject to taxes (see Resources). In general, treat the value of the item as taxable, except if the IRS regards the item as "de minimis." This means that the frequency in which the gift is given and its value are so small that it's not practical to account for it. De minimis fringe benefits, such as occasional snacks, flowers, books and meal money, are not taxable. Notably, fringe benefits are a type of pay that includes cash or the equivalent to cash, services or property.
Cash is usually intended for wage payment. Therefore, in most cases, it's taxable even if given as a gift. Cash is not taxable if it's for an occasional meal or it's provided for transportation so the employee can work overtime. - 2). Include the gift in the employee's gross pay unless an exception applies, as noted in Step 1. Gross pay is income before taxes and deductions are withheld.
- 3). Withhold gifts such as bonuses, prizes and awards as supplemental wages. The IRS regards supplemental wages as compensation paid in addition to the employee's regular wages. If you're paying the gift with the employee's regular paycheck but don't specify each amount, you can withhold federal income tax as if you're withholding for a single payment. If the gift is paid separately from regular wages, or if you combine them but specify each amount, you can withhold federal income tax at a flat 25 percent. IRS Circular E (Employer's Tax Guide) has the withholding tax tables and guidelines needed to withhold federal income tax.
- 4). Withhold Social Security tax and Medicare tax at the flat percentages of 6.2 percent and 1.45 percent, respectively. The withholding amounts depend on whether you're withholding as a separate payment or a combined payment, as noted in Step 3.
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