Are gift cards taxable?
Gift cards are a great way of giving thanks to your employees for all their hard work. They’re a smart, flexible choice that allows them the freedom to choose what to spend their reward on. While there are lots of benefits to gift cards, you may be wondering how they're viewed by the IRS and if they are taxable.
Both employers and employees need to understand whether gift cards should be declared in yearly tax returns. We answer the main questions about tax and gift cards here.
Are gift cards taxable?
Yes, gift cards are taxable when received when given to an employee from an employer. Employees will have to claim any funds received on gift cards from their employer in their tax return. Employers will also have to pay tax on any gift cards they give to employees. The IRS will expect tax to be paid on gift cards, even in values as low as $5.
Gift cards are viewed by the IRS as a supplemental wage (a bonus or commission on sales) and so they are subject to Social Security, Medicare, federal income taxes and state income tax (if applicable).
You may have thought about filing your gift cards under ‘de minimis benefits’ on a tax return but, because they have a cash value equivalent, they do not qualify for this. We've gone into a little more detail about de minimis benefits below.
What are de minimis benefits?
De minimis benefits cover compensation or expenses that are required for work to be completed and so are not included in tax returns. These benefits cover essential costs such as:
- meals for employees, where necessary
- transportation expenses
- tickets for entertainment and events
- gifts during the holiday season
- cell phone bills
- group term life insurance for a husband or wife of an employee or their kids (not worth $2,000 or more).
Gift cards do not fall under the remit of de minimis benefits because they are an alternative to cash.
Do employees have to pay tax on gift cards?
Yes, as an employee you will need to include any gift cards you've received from your employer in your tax return.
Gift cards are classified as a ‘fringe benefit’. This means that they are given to employees as an addition to their usual wages. You will need to state the gift card amount as a taxable expense on your tax return and what it was given for.
It doesn't matter if the card is for multiple stores or just one brand, if it is used in place of money in a transaction it's considered to be additional income for an employee. This is to ensure companies aren't giving bonuses in the form of gift cards to avoid paying any additional tax. In some cases, your employer may cover the cost of the tax you'll pay, to ensure you enjoy the whole gift card amount.
For example, if you receive a gift card for $100 but have to pay tax on this, you'll only get $70 to spend. However, your employer may top up the amount to $130, to ensure you can spend the whole $100.
Are gift cards taxable to employees?
Yes, gift cards are taxable to employees. So, to ensure your employees don't miss out after paying tax, it’s important to gross-up on the amount given. This means covering the amount that they will have to pay in taxes, on top of the price of the gift card, to ensure they get the full value from your gift.
There are some ways in which no tax is required on gift cards. For example, don't choose gift cards with a monetary value, instead give a gift card that is only redeemable against a product – for example, a Christmas ham in the holiday season. This means there is no monetary value on the card, it can only be used for one thing and therefore won't need to be accounted for in an employee's tax return.
How to tax gift cards in payroll
If you want to give your employees a gift card with a monetary value, there are some steps you'll need to follow when filling out their payroll.
You'll need to write the value of the gift card on theW-2 Form when issuing your employee's wages. There are three boxes to choose from when stating you have given your employee a gift. Box 1 is for wages, tips, and compensation, box 3 is for social security wages and box 5 is for Medicare and tips. A standard gift card will likely need to be accounted for in box 1.
This will inform the IRS that your employee has received an additional form of income and they'll need to then add it to their own tax return. If you're grossing-up on the total amount – to cover the cost of tax – you should put in the final cost of the gift card on the form.
If you're looking for a way to reward your employees, whether it's for the holiday season or just to say thanks, take a look at Kroger's full online gift card range.