Ready to start your first gift card program? While you may be excited to create your program and curate your first catalog of options, there is another aspect to budgeting for and building a program: the taxes.
When building your employee incentive programs, it’s important to understand the tax implications of any gifts you give. For tax purposes, there are only limited circumstances in which an employer can give considerations and have them classified as “gifts”.
Let’s take a look at the circumstances in which an employer can give gifts, how tax law impacts the classification of gifts, and the tax liability to the recipient. We’ll also share some ways to give your employees incentives that will delight them without adding on extra tax bills or paperwork.
Note: This is only a general overview of tax implications for gift cards. It should not be construed as legal or tax advice. Please consult a licensed tax professional in your state or jurisdiction for detailed information on how to handle taxes for gift card programs.
Gift cards and cash gifts of any amount are considered taxable income by the Internal Revenue Service (IRS). They are not covered under the de minimis benefits rules set forth in the internal revenue service code.
Gift cards are considered taxable income in order to close a wage loophole that would allow unscrupulous employers to compensate employees solely in “gifts” and avoid paying employment taxes on the wages.
For this reason, employers must use caution when building an incentive or gift program for their employees. Any gift amounts in cash or gift card form should be correctly reported to the IRS or your country's tax services authority for correct taxation on income tax an employee receives as part of their gross income.
One exception to the gift rule is gifts made between single individuals. For instance, you are supervisor can give you gift certificates or another award in any amount from personal property/funds as a thank you for service throughout the year, to recognize the milestones such as a birthday or graduation, or for any reason not connected to performance or business interests.
The tax laws covering employee gifts and award items vary depending on the gifting question. Certain fringe benefits, also called a de minimis benefit, are excluded from the taxation requirement. In general, a non cash gift such as food, tangible items, or experience items such as theater tickets are not considered taxable compensation, so long as they fall under a de minimis spending limit of $25. Gift certificates for a specific item may also be covered under the fringe benefit rules.
There is no limit to the amount of de minimis gifts, holiday gifts, and other perks offered annually to an individual employee, so long as the total value of gifts per employee in a calendar year does not exceed $1600.
For gifts over the de minimis fringe benefit limit, employers have the option of “grossing up” the gift amount By adding a sufficient amount to the gift to cover the tax. The employer can then withhold the surplus amount in order to cover the taxes. This illuminates the need for the employee to pay taxes on the gift amount or report it on their federal income tax return.
For employers that give cash or cash equivalent compensation as an employee benefit or gift, these gifts when properly reported can also be deducted as business expenses according to IRS regulations.
Europe’s tax laws handle sales tax differently than most of the US. While most states in the US have a percentage-based sales tax added to the purchase price of certain goods, the UK and Europe use what is known as a value-added tax (VATfor short) that is included in the price of purchase goods.
While gift cards, a gift certificate, or vouchers are not subject to VAT, like the United States, gift cards and cash are considered taxable wages when given from employer to employee(s). These wages must be reported on the employee's tax return unless the employer creates a surplus gift and withholds a portion to satisfy the tax. Award plaques like achievement awards and other tangible personal property is not included in this requirement. These nominal value items can be deducted without being taxed as income.
Exemptions to taxation for fringe benefits exist in Europe and the UK just as in the United States. For instance, employers can offer non-cash gifts such as food items, tangible rewards, and for company parties So long as the gifts in question fall under the maximum exemption limit, in most cases £50 including VAT.
In the United States, any gifts other than fringe benefits-such as gift cards or cash that have not been grossed up-must be reflected on the employee’s W-2 form. These types of gifts are considered additional compensation. They must be reported under the correct line of the W-2 form. Failure to report additional income may result in penalties, fines, or other IRS actions.
Despite the implications of offering additional taxable income, gift cards are still an excellent way to reward the hard work of employees.
Gift cards are:
Flexible - They can be used to create variety in your programs and offers.
Reliable - Gift cards are easy to deliver and use anywhere in the world.
Personalized - With thousands of options, it’s easy to create a personal connection with your recipient based on their interests and needs.
Digital - Gift cards let you send a welcomed gift without packaging, shipping, or other overhead considerations.
Valuable - Gift cards deliver great ROI for the organization and a positive experience for the gift recipient.
While subject to a gift tax, they are still more cost efficient than non cash gifts that must be packaged, shipped, and tracked.
Despite the tax implications of giving gift cards to your employees, using gift cards in an incentive program is still a great way to reward their efforts and promote performance. To make this process easier, consider using a gift card platform to help you deliver and track all of your gifts in a centralized way.
Runa makes it easy to send gift cards to your valuable employees and provides all of the necessary reporting to make tax time easier.
The following features help you maximize the value of your gift card programs and streamline taxes:
Global options: Whether you’re sending gift cards domestically or internationally, you can find options that will appeal to every recipient. Runa gives users access to thousands of the top gift cards recipients love.
Easy to use UI: The platform makes it easy to get started with your first gift card program or build a more elaborate incentive program for your employees. For those starting their gifting journey, you can build a program with just a credit card and a list of email addresses. As with our higher service tiers, you’ll still have visibility into spending for tax reporting.
Full reporting features: Runa offers a full assortment of reporting visualization tools so your finance team will have granular visibility into gift card spending and taxable gift amounts. These same reporting tools also allow you to make data-driven decisions about your programs, enhancing their impact and improving employee satisfaction.
Balance recapture: Only pay taxes on the dollars you actually spend. With balance recapture, you can reclaim unused portions of gift cards which allows you to accurately report spending and use those funds to maximize ROI in your programs.
Ready to start sending gift cards to employees? Let us show you how, with a free demo.