How Do I Record Employee Gift Cards?

Payroll Help

Your Payroll Software questions answered here

How Do I Record Employee Gift Cards?

Background

Are gift cards taxable income for employees? When you give a gift card to an employee, you must report the value of the gift card as taxable income if it can be used like cash.  The IRS considers gift cards as a taxable fringe benefit, because it is a “cash equivalent” item.

To Record the Gift Card in Patriot Software

Here is the process to ensure the value of the gift card is included in taxable income:

Step 1: Create a taxable money type.

You will use this to “pay” the employee the value of the gift card.  This is a one-time task.  In your Patriot payroll software, go to Settings > Payroll Settings > Hours & Money Types

Click “Add New” in the Money Types section.

  • For the Name, you can call it something like “Gift Card” or “Employee Goodwill.”
  • You can leave the Frequently Used star uncheck, unless you want to see this money type each time you run a payroll.
  • Leave the W-2 Box blank.
  • Keep the Taxable box checked.
  • Keep the W-2 Third Party Sick Pay box unchecked.
  • Click Save.

Step 2:  Run payroll and use the Gift Card Money Type to pay the employee

Before you run payroll, you may want to consider “grossing up” the amount of employee’s gift card money to cover the taxes they will have withheld.  For more info, see an example of how to calculate the gross-up amount in the article Are Gift Cards Taxable Income?  

We recommend you pay this gift card money as a separate payroll, since you won’t actually be giving this check to the employee.  It’s solely to increase the employee’s taxable income so the money is reported on the employee’s W-2.  

Payroll > Run a New Payroll

If you use direct deposit, be sure to disable it.   You have already given this money to the employee.  If you have other deductions and contributions, skip these by clicking “Show Advanced Options.”  You may need to confirm whether retirement plan deductions still need to be taken on goodwill compensation.

Unless you have saved the Gift Card money type as frequently used, toggle the “Show All Pay Types” switch.

Enter the amount of the gift card (either the actual amount or the grossed up amount if you want to give them extra to cover the taxes) in the Gift Card Money Type column.  Click Next Step when you’re finished entering hours and money on Step 1.

On Step 2, if you click “View Details,” you will see the Gift Card Money Type paid in the “Hours and Earnings” section. The employee’s income taxes will properly be withheld on the money.  The net pay amount should either be the exact amount of the gift card, if you are grossing up for taxes, or a little less, if the employee is paying the taxes out of original gift card amount.

Finish your payroll as you normally would.  Do not give these live checks to employees!  The employee’s now have the amount of the gift card included in their taxable wages and will be included on their W-2.

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