Your business might offer sales and seasonal offerings whenever a holiday rolls around. Or, you could decorate your office, retail space, or remote work location with some festive cheer. No matter how you celebrate the holidays, don’t forget to celebrate your employees, too. Holiday parties, gifts, and bonuses are great opportunities to give back to your team. But before you do, make sure you’re aware of payroll tax implications.
Holiday gifts for employees
Holiday gifts for employees can include holiday parties, gifts of tangible property, and bonuses. The holiday gifts you offer employees can depend on your:
- Business culture
The holiday will also help decide what you offer employees. Small gifts might be perfect for fall and winter holidays, but a picnic may fit the Fourth of July a bit better. Also, consider your surroundings and what your business storefront’s local area has to offer. A large, nearby restaurant could be the perfect place to host employees for dinner.
Remember that some employee gifts are different than others. When it comes to taxes, you must treat holiday parties and gifts differently than bonuses.
Holiday parties are a great way to show off holiday-themed clothing and once-in-a-lifetime dance skills. More than likely, your party—whether it’s a company-provided lunch or gift exchange—is a de minimis fringe benefit.
The IRS defines a de minimis fringe benefit as something that is:
- Infrequently given to employees
- Of small value
- Not a form of compensation
- Not cash or a cash equivalent
Do not account for de minimis benefits as employee income or pay payroll taxes on them. Here are a few holiday party ideas that may qualify as de minimis fringe benefits:
- Cocktail parties
- Group meals
- Employee picnics
Pro tip: You can offer de minimis fringe benefits for whatever holidays you or your employees would like to celebrate (e.g., Memorial Day, the Fourth of July, or Labor Day).
Speaking of de minimis benefits, holiday gifts can also qualify. To qualify, holiday gifts must be infrequent, low value, and not cash or a cash equivalent. What exactly is a low-value gift, anyways? The IRS notes that items with a value greater than $100 can’t be a de minimis benefit. In practice, this means you could give each of your employees a gift with a $100 value or less, and the gift would qualify as de minimis and be tax-free.
A gift must be a tangible item for the IRS to consider it a de minimis benefit. Gifts that are de minimis benefits include:
- Personalized office supplies
- Food items (e.g., ham, turkey, fruit basket, or baked goods)
- Toys or books
- Infrequent sports or theater event tickets
Gifts that are not de minimis benefits include:
- Memberships to a private country club or athletic facility
- The use of employer-owned or leased facilities
- The frequent and extensive use of an employer-provided vehicle
But if you give the gift of money or a cash equivalent, remember that the IRS considers both as wages, no matter the amount. You may be wondering, Are gift cards taxable to the employee? Yes. Because the IRS considers gift cards as cash equivalents, report them as wages.
Let’s look at an example of this in action. A local theater is putting on a seasonal play, and you want to gift your employees with tickets. If you give employees tickets directly, the tickets qualify as de minimis benefits and are excludable from wages. But, if you give your employees cash to purchase the tickets, you must report the cash as wages. There is an exception to this rule. If you have a voucher or a gift card redeemable for the tickets and nothing else, the voucher or the gift card may qualify as a de minimis fringe benefit.
See Publication 5137 for more information about de minimis benefits.
After a long year, holiday bonuses may be the perfect way to give back to your employees. Bonuses can come in the form of cash, checks, or gift cards.
Bonuses are taxable wages. Therefore, you must withhold payroll taxes, including income and FICA taxes.
If you decide on a holiday bonus (or cash or cash equivalent gifts), don’t forget about a tax gross-up. When a gift is taxable, a tax gross-up helps you increase the gross amount to cover the taxes withheld. Your employees can enjoy their gift without seeing it shrink after taxes.
Want to learn how to gross-up your holiday gifts? Follow these four steps:
- Add up all federal, state, and local tax rates
- Find the net percent by subtracting one from the combined tax rates
1 – Tax = Net Percent
- To find the gross payment, divide the net payment (the dollar amount you want your employees to receive) by the net percent
Net Payment / Net Percent = Gross Payment
- Check your answer by multiplying your gross payment by the tax rate, then subtract the dollar amount of taxes from your gross payment.
Here’s what this looks like in action:
Let’s say you want to give your employees a $150 holiday bonus, but you want to make sure the bonus stays the same after taxes. Here’s what you need to do.
Make sure that you cover all of your taxes. Bonuses have a federal supplemental tax rate of 22%. You’re in a state without state income tax (0.0%). And, don’t forget about Social Security tax (6.20%) and Medicare tax (1.45%).
Convert these tax rates into decimals by moving the decimal point two places to the left and adding them all together.
0.22 (federal supplemental tax) + 0.00 (state income tax) + 0.0620 (Social Security tax) + 0.0145 (Medicare tax) = 0.2965
Subtract one from the sum of your tax rate to find the net percent:
1 – 0.2965 = 0.7035 (net percent)
Divide the net payment by the net percent to find the gross payment:
$150 / 0.7035 = $213.22 (gross payment)
To make sure your numbers are correct, multiply your gross payment by the combined taxes to find the total taxes withheld:
$213.22 X 0.2965 = $63.22 (total tax withheld)
Then, subtract the taxes from your gross payment to find the net bonus:
$213.22 – $63.22 = $150 (net payment)
For your employees to get the total $150 bonus, you must give them $213.22 before taxes.
Deducting holiday gifts
Don’t see the point in holiday gifts? Before you ignore holiday gifts altogether, there’s something you should know. Some holiday gifts and bonuses are deductible as business expenses. Consider this the gift that keeps on giving. You give a gift to your employees and get a gift back from the IRS.
According to the IRS, gifts up to $25 are tax deductible. Make sure you don’t include incidental costs like engraving, packing, or shipping in the $25 limit. And, don’t consider your gift for the $25 per person limit if it is worth less than $4.00 and engraved with your business name.
Make sure you keep proper records when deducting holiday gifts.
Since we’re on the topic of gifts … give yourself the gift of Patriot’s online payroll software. Patriot offers quick and easy payroll with all the perks you need, like our net to gross payroll tool to make employee bonuses a breeze. Try it for free today!
This article has been updated from its original publication date of December 11, 2015.This is not intended as legal advice; for more information, please click here.