Can I give a gift to an employee without tax? That’s a question we get a lot, especially towards the end of the year. Gifts to employees are a great way to reward them for their hard work. However, there’s a Grinch waiting in the wings trying to tax these gifts. So how can we make sure the Grinch goes home empty handed? We want to make sure that our clients understand what they need to do and how to track it so that employees don’t get hit with additional taxable income they weren’t expecting.
Can I Give an Employee a Tax Free Bonus?
Most clients come to us saying, “I want to give money to my employees, I just don’t want them to pay tax for it. What can I do? I don’t want to have to run this through payroll.” Unfortunately, that’s exactly what’s going to happen. Monetary gifts and gift cards are taxable to the employees, but it’s also taxable for other payroll taxes to you as the employer. So, if you’re wanting to give a $100 or $500 gift to your employee in cash, you have to put that on their W-2, and you’re going to be subject to tax on that.
There’s other categories of gifts that you may not think of that are taxable, such as monetary prizes or achievement awards. So, for example, an award for a sales person who meets their sales goals. That is taxable, just like any other compensation like bonuses, salary, or commissions.
Non monetary prizes, such as vacation trips, are also considered taxable income. And a gift over $75 is automatically considered a taxable gift. This includes gift cards. Typically, if you have a payroll company, it’s picked up as a bonus and runs through their employee’s salary.
Can an Employer Give an Employee a Tax Free Gift?
So one of the questions that we get a lot is, “I want my employee to get $500. If I need to run this through their payroll, and I want them to net $500, how does that work?” And so we tell them that what has to happen is you actually have to give them more than $500 in order to basically pay for their withholding, pay for all the taxes (both the employer and the employee piece of the taxes,) and the state withholdings if there’s a local withholding in your jurisdiction or in your state or any of those other types of taxes that are based on wages.
You have to actually give them more than $500 in order for them to net the $500. We suggest talking with your payroll company in order to determine what that gross number actually needs to be. They have tools within their payroll software to be able to just run that net, and calculate all the other pieces that go into it to get to the gross amount.
Most payroll providers charge based on a per paycheck fee. So you want to try to have that run during a regular payroll, rather than a special payroll just for that gift. Then you’re not incurring additional payroll service provider fees.
In most cases, once the client realizes that they actually have to pay more than the bonus that they were originally anticipating, most of them decide that they want to just pay the $500. And the taxes are then taken out and the employee gets the net check, whatever that is for them.
How Do I Gift an Employee Tax Free?
But there are ways to give gifts to employees that are not subject to tax. A non monetary cash gift under $75 is not taxable. That could be the Thanksgiving turkey, or the Christmas ham, or any end of year non cash gift. It just can’t be more than $75. You could also provide length of service or safety achievement awards that, again, are non cash awards. Those two particular awards are not subject to tax. There is also a per employee limit for the year. You can’t go over $1,600 per year per employee for the combination of all these non cash gifts.
An example of length of service award would be an anniversary gift. Maybe an employee has been working for your company for a year and you give them a box of chocolates or a bottle of wine. And the safety achievement awards in particular industries work out really well. With a former firm that I worked at, we had a contractor client who, every month, would head safety meetings and give out the safety bonus awards to the employees who met certain specifications. Providing those awards helps the company in many different ways.
A great example of what doesn’t fall under that is a sales award. For instance, an award for meeting a sales quota. This is a common award in the sales industry for doing what you’re supposed to be doing in your job. And it is still going to be subject to taxes.
How to Keep Track of Employee Gifts
Documenting what you’re doing is key. A lot of people may go to a convenience store and get a bunch of gift cards that are under $75 and hand them out, but maybe don’t document exactly what they bought them for. So the convenience store cost appears in your books and records, but it doesn’t say what it was for. So having proof of what it was for and how you distributed them is really important.
Let’s say you had achievement awards. Keep a list of people who received them and the amount that they received along with the receipt for the purchases. Now if you are examined by the IRS you have proof of exactly where the money went and what it was for. A line item on your P&L that says gifts isn’t going to be enough detail to understand who the gifts were for and if you are meeting the requirements to put it on the payroll.
If you are looking for more information about getting organized for tax time, take this free quiz to see how ready you are for the upcoming tax season. This could be a great segue into motivating yourself to get ready for tax time.
