Giving Gifts to Employees: Best Practices

Many companies give gifts to their employees around the holidays and for special occasions like work anniversaries or exceptional achievements to show appreciation. When giving gifts, it’s important for employers to understand the tax consequences for their business and for their employees. Learn about the benefits of and reasons for gift-giving, example gifts and the tax implications of providing employee gifts. 

 

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Benefits of giving gifts to employees

You can reap many benefits through gift-giving whether you do so on a personal level or a professional one. Often, giving presents to your employees is a mutually beneficial scenario. Some of the benefits include increases in the following:

  • Motivation: Giving gifts can motivate your employees to work harder for the company.
  • Productivity: Some employees can become more productive after receiving a gift.
  • Morale: Many employees, and perhaps the company overall, get a boost in morale from getting a present.
  • Value: Gifts show you’re thinking of your employees, which causes them to feel valued.
  • Generosity: You as a manager get the benefit of feeling generous.

 

Reasons for giving gifts

Here are some of the more popular occasions where employers give their employees gifts:

  • Birthdays
  • Holidays
  • Work-related achievements
  • Incentive awards
  • Work anniversaries

Related: Employee Benefits: Types of Perks to Offer Employees

 

Examples of gifts

From tangible items to events to cash, here are some of the most common types of presents employers give to their employees:

  • Flowers
  • Plaques
  • Food
  • Tickets to events
  • Meals or other organized social gatherings
  • Books
  • Cash bonuses
  • Gift cards
  • Small trinkets

Related: Years of Service Awards: Implementation Tips for Managers

 

How to provide employee gifts as tax deductions

Employers can give anything they’d like to their employees as a gift, but it’s important to understand the tax implications. Typically, employers avoid giving an employee a gift that comes with substantial taxation without the employee’s knowledge. Consider these steps when determining what tax-free (for the employee) gifts you might provide: 

 

1. Consider the value

The value of the gift can have an impact on how it’s taxed. Generally, any cash gift, whether it’s an annual bonus or a gift card to a restaurant, is considered a form of income and the employee must account for it when they file their taxes. 

Tangible items of a low cash value fall under a tax stipulation called “de minimis fringes.” This benefit provides that employers can give gifts to their employees at no tax consequence to the employee and as a fully deductible tax item for the employer. To qualify as a de minimis fringes gift, the employer must offer the gift infrequently and it must have an extremely low fair market value, or FMV, that makes accounting for the item a hassle. 

 

2. Think about the item

Cash or cash-equivalent gifts are subject to income taxation by your employee. If you want to limit tax implications on your employees, opt for a tangible gift like a book or flowers rather than money or a gift card. Examples of de minimis fringes gifts might include: 

  • Low cash-value tangible holiday or birthday gifts
  • Physical gifts related to outstanding work performance
  • Infrequent gatherings or events for employees

 

3. Determine the reason

One situation in which employers can give their employees cash or cash equivalent gifts with no tax implications to the employee is for awards. Employee achievement, service and safety awards are not taxable up to a certain amount. The award must meet a series of stipulations as provided by the IRS, but generally, if the award is less than $400, you as the employer can deduct the expense from your taxes and the employee doesn’t have to list the award as income on their taxes. 

 

4. Consult your accountant

If you’re unsure about the tax implications of a potential gift for your employee or employees, consult your accountant or tax attorney for guidance. 

 

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Frequently asked questions about employee gifts

What is a good gift to give employees?

The type of present you give your employees will depend on things like your overall budget, tax expectations, number of employees and even the industry you work in. For example, if you’re giving holiday gifts to every member of your publishing company, you might select custom notebooks as the present. These should fall in the de minimis fringes gift category, which means a tax deduction for you and no tax implications for your employees.

How do I gift an employee tax-free?

It’s best to consult with an accountant or tax attorney to ensure your potential gift meets all the requirements of a tax-free gift, but generally, you’ll want to consider de minimis fringes gifts to avoid any tax costs for your employees. If you’re hoping to provide a gift to an employee-related to their years of service or an exemplary achievement, remember to keep the gift’s FMV under $400.

Can I give gift cards to my employees?

You can give gift cards to your employees as presents, but your employees must then list the amount of the gift card as income on their annual taxes. Any cash or cash equivalent given by an employer to an employee is considered income by the IRS and must be taxed that way.

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