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Bah Humbug! The Ghost of Taxable Income for Christmas Presents May Come to Haunt You and Your Employees This Holiday Season

By: Mark Rhea, J.D.- Senior Assistant Accountant

During the Holiday Season, many employers want to show appreciation for their employees and the hard work they have done all year by giving presents. Some people might not think twice about doing something nice for their employees, but Treasury rules and regulations can turn that generosity into a potential headache for both employers and employees.

For example, let’s assume that the owner of Scrooge Enterprises, Ebenezer, decides that he wants to spread holiday cheer by giving each one of his employees a copy of his favorite movie “A Christmas Carol.” He has two options to accomplish this. The first is that he purchases copies of “A Christmas Carol” DVDs at $20 per DVD and gives those copies to his employees. The second is that he purchases $20 gift cards to the same store where he would have bought the DVDs.

If Ebenezer decides that he wants to go to the store and purchase the DVDs himself and give those gifts to his employees, the IRS would not treat those gifts as income to his employees and the IRS would permit Ebenezer to fully deduct the cost of those DVDs as the $20 spent per DVD would likely be considered a “de minimis fringe benefit” holiday gift with a “low fair market value.” See Treasury Reg § 1.132-6(e)(1). However, if Ebenezer decides to purchase gift cards in the amount of $20 to the same store that he would have bought the DVDs and gives those gift cards to his employees so they can go to the store and purchase “A Christmas Carol” on their own, the IRS would consider that gift card a cash equivalent and therefore must be reported as income and subject to employment taxes. Cash or cash equivalents, no matter how small, are never considered a “de minimis fringe benefit” excludable as income. See Treasury Reg § 1.132-6(c).

Ebenezer should take comfort in the fact that he can still treat his employees to a holiday cocktail party or meal at his favorite establishment as “occasional” cocktail parties and group meals are still considered “de minimis fringe benefits.” See See Treasury Reg § 1.132-6(e)(1). However, if Ebenezer decides to buy his employees gift cards to his favorite establishment instead of taking his employees there himself, the IRS again would find that those gift cards would be cash equivalents and treated as income subject to employment taxes.

There are many regulations and rules governing the giving of gifts to employees not just during the holidays, but year-round and for special situations such as employee awards and retirements. Holbrook & Manter is prepared to help you answer any questions regarding your generosity with your employees. Happy Holidays!