Last week the RDTC Tax Help Blog posted a new entry in the deduction of the week series on holiday gifts for employees. Fortunately for employers, some expenses related to holiday gifts for workers are indeed tax deductible.
Must be a Gift
According to the U.S. Supreme Court, in order to be considered a "gift" the item must be given with "respect, admiration, charity or like impulses." It cannot be given as a way to reward past performances or serve as an incentive for future performance.
De Minimis
The IRS will only allow an employer to deduct a gift given to an employee if it meets the requirements of a de minimis fringe benefit, which is "any property or service the value of which is so small as to make accounting for it unreasonable or administratively impracticable after taking into account the frequency with which similar fringes are provided by the employer to the employer's employees." According to the Internal Revenue Code Section 132(e)(1), birthday and holiday gifts can qualify as a de minimis fringe benefit as long as its value does not exceed $100.
Easily Exchangeable for Cash
If you give an employee gifts of cash, or items that are "easily exchangeable for cash" (such as a gift card) then the funds are subject to payroll taxes. You will need to report these earnings to the IRS, and your employees will be responsible for paying the associated income taxes.