Before you give out this year's bonuses, awards, or gifts, consider the tax implications - both to your own business taxes and to your employee's income taxes. These little extras carry tax implications for both you and your employees.
Two things you must consider... First, is the bonus, award, or gift taxable to your employee? Second, is the bonus, award, or gift a deductible business expense?
Are Bonuses to Employees Deductible and/or Taxable?
Bonuses to your employees are deductible to you as a business expense. However, they are considered income to your employee and are taxable. You must withhold income taxes and FICA taxes on employee bonuses. You should offer your employees the opportunity to change their withholding on Form W-4 as many employees like to change their bonus check withholding so they receive more of the bonus.
Can I Deduct Awards I Give to Employees?
You can generally deduct amounts you pay to your employees as awards, whether paid in cash or property. The amount that you deduct as a nonwage business expense depends on whether the award is a "qualified plan award." Your deduction for any one employee during a tax year is limited to $400 for awards that are not qualified plan awards or $1,600 for all awards, whether or not qualified plan awards.
The value of a property award can be excluded from your employee's income up to the amount that you are allowed to claim as a deduction. Any award of cash, travel, gift certificates or other "cash equivalent" is considered compensation and subject to federal and payroll taxes.
The difference between a "qualified plan award" and "non-qualified plan award" can get tricky, so if you have questions, please give us a call.
Are Gift Cards and Gift Certificates given to Employees Taxable?
Gift certificates and gift cards are for the most part taxable to employees because the IRS considers them a "cash equivalent" item. But, a gift card that is minimal in value, provided infrequently, and is administratively impractical to account for, may be excludable as a "de minimis" fringe benefit, depending on facts and circumstances.
My advice to you, if you are going to give your employee a gift card or certificate, keep it under $25 since "de minimis" fringe benefits are not subject to tax to your employees and can be taken as a business expense.
What is a "Di Minimis" Fringe Benefit?
The IRS says a "de minimis" fringe benefit is small in value and accounting for the benefit would be administratively impractical or unreasonable. Examples are - occasional tickets to entertainment events, holiday turkeys, occasional dinners, flowers, etc.