It's the holidays and this time of year many employers choose to do something special for their employees. For most, this means a cash bonus, which employers often opt to pay with the last payroll of the year to ensure taxes are collected and remitted accurately. Other employers opt for a physical gift or a gift card. In some cases, this option is chosen because they assume these items are tax exempt. IRS Publication 15-B, Employers Tax Guide to Fringe Benefits, indicates this is not always true.
The taxability of physical gifts, such as gift baskets, can be a gray area. Publication 15-B indicates de minimis benefits are tax exempt. De minimis benefits are defined as any non-cash product or service that is of so little value, it would be administratively impracticable to record. Holiday or birthday gifts, other than cash, of low fair market value are listed as an example of a de minimis benefit. However, the employer is left to determine what qualifies as low fair market value. Employers should consult with their CPA on the taxability of physical gifts to determine if the value needs to be reported with payroll.
The IRS classifies gift cards and gift certificates as cash so they are always taxable regardless of the value. The value of the gift card needs to be reported with payroll to ensure the appropriate taxes are collected from the employee and remitted with the employer's portion of taxes. The only time a gift card or gift certificate is not taxable is when it is of low market value and can be redeemed for only a specific item. In this case it can be classified as a de minimis benefit and does not need to be reported with payroll.