Dear Littler,

We’d like to provide gifts to our staff for the holidays but are unsure which types of gifts would trigger tax obligations for our employees. We’d also like to offer donation matching for our employees’ favorite causes this season but are unsure how that works. Is there any way you can make these issues less taxing for us?

—Jingle Bill in Kansas City

Dear Jingle Bill,

Providing holiday gifts to employees may be taxing, in more ways than one. Some forethought may avoid putting a damper on the holiday spirit.

Non-taxable gifts

The Internal Revenue Code (Code) generally does not allow employers to give “gifts” to their employees. Rather, any amount given, or the fair market value of any property transferred, from an employer to an employee, or for the benefit of an employee, is considered part of the employee’s taxable wages unless there is an express exception.¹

Fortunately, there are some express exemptions in the Code.  One such exception is for “de minimis fringe benefits,” which may cover some holiday gifts. This exclusion typically applies if: (1) the value of the item given is small; (2) the item is infrequently provided; and (3) it is administratively impracticable for the employer to account for it.² Thus, benefits such as occasional parties for employees or their guests, occasional sports or theater tickets, gift baskets, or coffee and doughnuts, would be excludable from income.³ Season tickets, on the other hand, would not be excludable. Nor would membership in a private country club, or the use of a company-owned lake house. The determination of whether a gift constitutes a de minimis fringe benefit will depend on all of the facts and circumstances.

That said, cash gifts are never a de minimis fringe benefit, no matter how frequent or valuable. In other words, even a one-time $10 cash award should be treated as taxable wages. Cash equivalents such as gift cards are also not de minimis fringe benefits “even if the same property or service acquired (if provided in kind) would be excludable.”⁴ For example, if an employer gave employees a certificate once a year during the holidays that could be exchanged only for a turkey, that gift likely would be excludable as a de minimis fringe benefit. But if the same employer handed out $20 gift cards to the local grocery store for employees to buy a turkey, that benefit would not be considered de minimis; those gift cards would be treated as cash because they could be used like cash to buy any item at the store.⁵

Determining whether a gift is de minimis can be tricky.  There is no set limit on the value of gifts for purposes of the de minimis exclusion. That is, the IRS has not announced a rule that the gift cannot exceed a certain amount (say, $75) and qualify as de minimis. As you might expect, the IRS can be quite conservative in these gray areas. Employers might want to adopt a cautious approach as well, choosing tangible items that are lower in value (e.g., no more than $50).

Donation matching

Donation matching may be the gift that keeps on giving. Employees get to give to their favorite causes and employers get in on the fun by matching the gift, thereby showing support for the employee and their cause. What’s better than that? A tax deduction for you, the employer!

Amounts paid by a corporate employer as a contribution to a charitable institution are deductible by the corporation in the manner allowable for charitable contributions.⁶ This is true even if the employee is allowed to designate the charity to which the employer contributes. This rule applies to an employer's contributions if the employee does not benefit personally from the contribution. The contribution must also be paid by the employer directly to a qualified charitable institution.⁷ Further, the deduction is limited to 10% of the corporation’s taxable income.⁸

Qualified organizations include nonprofit groups that are religious, charitable, educational, scientific, or literary in purpose, or that work to prevent cruelty to children or animals.⁹  You can ask the organization if it is a qualified organization, or you can make a list and check it twice yourself by visiting IRS.gov/TEOS.

Taxable gifts

Although de minimis gifts and donation matching may have tax advantages, nothing prevents an employer from giving taxable gifts to employees. Thus, if an employer wants to give its employees a $100 gift card to use as they please, it is free to do so, with the caveat being that the $100 is treated as taxable wages. Employers may also, but are not required, to “gross up” a taxable gift, meaning the employer covers the taxes (so the $100 gift card is actually worth $100 to the employee after taxes). This is perfectly acceptable as long as the tax rules are followed.

We hope this helps clarify things for you, Jingle Bill. When in doubt, consult your employment tax counsel before implementing any new gift or donation policies.