Updated November 29, 2023
While the desire to give gifts to hard-working employees is straightforward, for employers, understanding tax and reporting implications can feel anything but. Unless you follow the right rules, your employees could face a tax bill for your generosity.
So here’s a layperson's guide for companies to follow to understand the tax obligations of gifts to U.S. employees.
Disclaimer: While this article was written using the IRS’s most recent De Minimis Fringe Benefit Guide, it does not constitute legal advice. Always consult a legal expert to determine your exact taxation and reporting requirements.
Are gifts to employees considered taxable income?
The most important question for employers to answer is whether gifts are considered taxable compensation.
Taxable benefits, such as wages, commissions and tips, bonuses, and stock options, are subject to both income tax and employment taxes. Plus, the value of taxable gifts must be reported on the employee’s W-2 form for that year.
Most gifts to employees are considered taxable income, unless they’re what the IRS calls de minimis fringe benefits (more on that below).
Employers may want to keep benefits below the de minimis threshold in order to keep their employees from facing a tax bill for their generosity – and to sidestep the complexity of reporting this income on employees’ W-2s.
Which employee gifts aren’t subject to taxes?
Most gifts to employees are considered taxable income, so it’s easiest to simply outline gifts to employees that are de minimis and not subject to taxation.
For a gift to be considered non-taxable, it must meet all these criteria:
1. It’s not cash.
Cash gifts and bonuses are virtually always considered taxable income, no matter the amount.
2. It’s not a gift card.
Like cash, gift cards are always taxable – no matter how small or large.
3. It has a low fair-market value.
The IRS keeps the exact amount vague, but clarifies that anything worth more than $100 cannot be considered de minimis. Some legal experts draw the line at $75. It’s important to note that if your gift exceeds $100 and is clearly taxable, the entire amount is treated as taxable wages, not just the amount in excess of $100.
4. It’s occasional or infrequent.
Typical gifts to employees, like birthdays or work anniversaries, meet this criterion. This rule is to prevent abuse, like employers constantly gifting employees as a disguised form of compensation.
⬆️ While those may seem like narrow criteria, they actually leave employers with a lot of flexibility. If you want to give your employees gifts for their birthdays or other occasions, provided you avoid cash, gift cards, and $100+ gifts, you should generally steer clear of IRS reporting and taxation obligations.
Which employee gifts are subject to taxes?
A gift is almost always considered taxable compensation if it meets any of these criteria:
1. It’s cash or redeemable for cash (e.g. point systems).
2. It’s a gift card.
3. It costs more than $100.
Are Goody gift collections subject to taxes?
A popular option on Goody is to send the Gift of Choice, where you set a price point and let the recipient choose from a selection of gifts within that range (with no pricing shown).
While it may seem a lot like sending a gift card, Goody's Gift of Choice is likely not be subject to taxes provided your gifts meet the usual criteria outlined above – chiefly, that it’s not more than $100.
That’s because Goody gift collections are primarily composed of physical gift options, rather than gift cards. The Gift of Choice – like all physical gifts sent on Goody – cannot be swapped for gift cards by U.S. recipients.
We even have a special Gift of Choice collection that removes all digital products that might be treated as gift cards by the IRS.
That makes the Gift of Choice a wonderful alternative to gift cards for rewarding U.S. employees – without saddling them with a tax bill!
Employee achievement awards: The special case
Since we’re talking about the IRS, it can’t be that simple, of course.
Unlike other gifts to employees which must be low-value in order to qualify as de minimis (non-taxable), there is a specific carve-out for employee achievement awards given for length-of-service or safety.
You still can’t give employees cash or cash-equivalent gift cards tax-free, but you can give much more valuable physical gifts (up to $1,600 fair-market-value in gifts per employee per year) without tax obligations.
To do so, employers must meet strict requirements that the IRS documents in their Fringe Benefit Guide. Very specific rules apply, like giving length-of-service awards for five or more years of service; not giving such awards to employees too frequently or too broadly; and awarding them as part of a “meaningful presentation” and a documented program (which can’t favor highly compensated employees, either).
Technically, gifts given under such programs (called “qualified plan awards”) can go as high as $1,600 per employee per year before they become taxable income. However, you may want to keep gifts under $400 to avoid record-keeping and tracking required for determining the taxability of awards.
Tl;dr: If you’re planning a larger, once-or-twice-in-a-decade work anniversary or retirement gift for an employee, you might be able to avoid tax obligations. Your best bet is to consult the IRS’s Fringe Benefit Guide (see “Excludable Awards” section), to ensure your plan conforms with all rules and regulations.
Examples of taxable and non-taxable employee gifts
- A $25 Amazon gift card is taxable under any circumstance, because it’s a gift card.
- A $50 “Treat Yourself” Goody gift collection celebrating a company milestone is probably not taxable, because it’s a physical gift, given for a special occasion, and relatively low-value.
- A $46 Lula’s Garden plant given for an employee’s birthday is probably not taxable, because it’s a physical gift, given for a special occasion, and relatively low value.
- A $199 Theragun Mini given for an employee’s birthday is taxable, because it’s in excess of the IRS’s $100 de minimis threshold.
- A $199 Theragun Mini given for an employee’s 1-year work anniversary is taxable, because it exceeds the $100 threshold and it doesn’t meet the qualifications for a length-of-service achievement award (i.e. 5 years of service, minimum).
- A $199 Theragun Mini given for an employee’s 10-year work anniversary or retirement may not be taxable, if the gift meets all other IRS requirements for Employee Achievement Awards.
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