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‘Tis The Season
It’s that time of the year — the season of giving — when employee appreciation can go a long way in terms of employee happiness and engagement.
A recent online poll of U.S. employers found that a majority, more than 90% planned to offer some gift or reward to employees during the holidays.
But, before you start passing out the awesome gifts we list or other cool treats, you’ll need to know the rules around employee gift-giving. While you may be celebrating the spirit, the tax authorities may be somewhat of a Grinch.
Scroll below for details on:
- Gift Giving in the United States
- De minimis fringe benefits in the United States
- Gift Giving in Canada
Tax Implications of Gift Giving in the United States
Almost any gift you give an employee in the U.S. (unless it qualifies as de minimis) is subject to income tax.
For example, a $500 iPad given as a gift could cost an employee up to $200 in taxes if claimed legally, which does little for increasing employee happiness.
Most gifts are seen as taxable benefits (fringe benefits) for your employees, which means they will be taxed on them and the values will need to be included in your employee’s year-end forms.
The Internal Revenue Service (IRS) says when it comes to taxable fringe benefits, “The benefit is subject to employment taxes and must be reported on Form W-2.”
De Minimis Fringe Benefits
De minimis, by definition, means it’s too trivial or minor to merit consideration.
Certain de minimis fringe benefits can allow an employer to give “traditional birthday and holiday gifts of property (not cash) with a low fair market value” without the employee paying additional taxes.
According to the IRS, “If an employer distributes turkeys, hams, or other merchandise of nominal value to its employees at holidays, the value of these items would not constitute salary or wages.”
The frequency of gifts and fringe benefits given to an employee can also have an effect on whether they’re considered de minimis.
As a rule, as long as all employees are receiving the same fringe benefits, the frequency does not matter.
For example, a company can provide lunch for all of its employees every day of the year, as long as this benefit is available to all employees. If only one or select employees receive this benefit, it will no longer qualify as de minimis and will be subject to income tax.
The following items qualify as de minimis fringe benefits and are excludable from income tax:
- Traditional birthday or holiday gifts (not cash) with a low fair market value.
- Occasional personal use of a copying machine or other office equipment.
- Occasional cocktail parties or group meals.
- Occasional theater or sporting event tickets.
- Occasional coffee, donuts and soft drinks.
- Special circumstances, such as flowers, fruit, books, or similar items during an illness or for individual recognition.
- The value of a merit or service award presented as cash cannot be greater than $400.
- The value of non-monetary awards is a gray area.
The following items do not qualify as de minimis fringe benefits and are considered taxable income tax:
In the U.S., a cash gift, gift card or gift certificate (no matter how large or small the amount) will always be taxable.
- A $50 cash bonus doesn’t qualify as a de minimis fringe benefits and is a taxable gift.
- A $15 Starbucks card doesn’t qualify de minimis fringe benefits and is a taxable gift.
- A $30 grocery gift card doesn’t qualify de minimis fringe benefits and is a taxable gift.
You see the trend here?
But, don’t be discouraged, where there’s a will there’s a way. If gift giving is a tradition you value, the best practice would be to work with a qualified tax and/or accounting professional in order to determine the implications of the gifts ahead of time.
Tax Implications of Gift Giving in Canada
An employer can give an employee up to $500 in non-cash gifts each year before the gift becomes taxable. In Canada, the rules around gift-giving are a little more straightforward.
In fact, the number of non-cash gifts and awards an employer can give an employee is unlimited as long as the combined total value is $500 or less annually.
However, anything over the $500 employee gift limit, or any form of cash, is considered a tax benefit that employees will need to pay additional taxes on at the end of the year.
For example, if the gifts you give an employee have a total value of $650, there is a taxable benefit of $150 at year-end.
It is also the employer’s responsibility to include these benefits in an employee’s T4.
For the purpose of the exemption, small items are not calculated within the $500 gift-giving limit. Any items of small or trivial value do not have to be included when calculating the total value of gifts and awards given within one year.
Gifts versus rewards:
The Canada Revenue Agency (CRA), has specific definitions for gifts and rewards.
- A gift is something offered on a holiday or special occasion.
- A reward is employment-based and merit-related.
Non-taxable items of small or trivial value include:
- Coffee, tea or similar beverages.
- Company branded merchandise including T-shirts, mugs, etc.
- Awards such as plaques or trophies.
Regardless of the cost, the following gifts and awards are always considered taxable benefits:
- Cash or near-cash gifts and awards, including holiday bonuses or gift certificates.
- Reward points and similar systems redeemable for airfare or other rewards — if these points are controlled by the company.
- A reimbursement for a gift or award that the employee selected and paid for.
- Any gift or reward that’s given by closely held corporations to shareholders or other related persons.
- Gifts or awards given directly by the manufacturer to the employee of a dealer.
- Gifts or prizes awarded by social committees are taxable if the committee is funded by the employer.
Just like in the United States, gift giving in Canada can be subject to nuance. Again, it is best to consult with a qualified tax and/or accounting professional to ensure that everyone experiences the intended joy.
The People Factor — What Your Employees Want
When asked how they would like their employers to show appreciation, employees said:
- 27% cash
- 16% Fridays off
- 14% employee training and advancement opportunities
- 12% movie or event tickets
- 8% flexible parental leave or telecommuting days
- 6% massages
It’s worth noting that a significant number of workers indicated they simply long for a thank-you from their boss.
“The holidays provide the perfect time for businesses to set themselves apart and attract great talent by recognizing their employees’ hard work.”
— Express Employment Professionals CEO Bob Funk
Disclaimer: The advice we share on our blog is intended to be informational. It does not replace the expertise of accredited business professionals.
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