How Do I Record Employee Gift Cards?

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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

First, there are some one-time tasks you’ll need to do at the company level:

  1. Add a taxable “Gift Card” money type at the company level (one time).
  2. Add a post-tax “Gift Card Offset” company level deduction (one time).
  3. Assign the post-tax “Gift Card Offset” deduction to the employee (one time).
  4. Run payroll and use the “Gift Card” money type for the employee.
  5. After payroll, inactivate the “Gift Card Offset” employee deduction.

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.”
  • 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:  Create a Non-taxable company level deduction.  

When you pay the gift card money type, you will need to deduct for the same amount, so the employee isn’t paid twice (once with the actual gift card and once in their paycheck).  This is a one-time task.

Settings > Payroll Settings > Deductions & Contributions

  • Click “Add New” in the Deductions section.
  • For the Type, choose “Post-Tax.”  This will make sure that the gift card money is taxed.
  • For the Description, you can call it “Gift Card Offset” or something similar.
  • Choose Fixed Dollar for the Method.
  • Leave the Amount blank.
  • Leave the Limits fields blank.
  • Leave the W-2 Box blank.
  • Click Save.

Step 3: Assign this Gift Card Offset Deduction to the employee’s record.

  • Payroll > View Employees > Click Employee Name
  • In their Deductions & Contributions tab, click “Add New.”
  • Select the Gift Card Offset from the deduction list.
  • Enter the amount of the gift card you have paid.
  • Click Save.

Step 4:  Run payroll and use the Gift Card Money Type and Deduction to the employee

You can pay this gift card money as a separate payroll, or include with their normal payroll.

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?

Payroll > Run a New Payroll

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, and then the Gift Card Offset in their “Deductions” section.  The employee’s income taxes will properly be withheld on the money, but the gift card amount will not be paid in the check.

Finish your payroll as you normally would.  

Step 5:  Inactivate the “Gift Card Offset” deduction type from the employee’s record once you have finished payroll.

You don’t want this deduction to keep coming out in future payrolls.

  • Payroll > View Employees > Click Employee Name
  • In their Deductions & Contributions tab, click the Edit icon for the “Gift Card Offset” deduction.
  • Uncheck the “Active” box.
  • Click Save.

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