Corporate gifting is a thoughtful way to reward and recognize employees. But, as with all transactions, tax is an important consideration. The Internal Revenue Code (IRC) treats gifts from employers differently than personal gifts. Even seemingly small offerings like holiday bonuses or gift cards can trigger tax and withholding obligations. This post summarizes how the general rules apply to both the employer and the employee.

1. What is a “Gift”?

Under IRC § 61, almost anything paid by an employer to an employee is income, unless a specific exception applies. IRC § 102(a) allows taxpayers to exclude value from a gift in the personal context, but not when it comes from an employer (see IRC § 102(c)). Following are some general taxability rules for certain items “gifted” by an employer to an employee.

2. Cash & Cash‑Equivalent Gifts = Taxable Compensation

Below are the general rules regarding cash and cash equivalent gifts from an employer to an employee.

Employee side:

• It’s treated like wages. Employees must report the full amount as income on their Form 1040.

Employer side:

• Employers must withhold regular income tax, Social Security, and Medicare, and report the gift as wages on Form W-2.
• Deductible as ordinary business expenses under IRC § 162—just like salaries and bonuses.
• Subject to payroll taxes (employer match for FICA, FUTA, SUTA) because this is wage income.

3. Non‑Cash, Nominal Gifts can = “Gifts”

Gifts of tangible personal property—think mugs, plaques, small gift baskets—are typically exempt as de minimis fringe benefits under IRC § 132(e), if they are all of the following:

1. Not cash or cash equivalent;
2. Infrequent;
3. “Nominal” in value (commonly considered $100 or less per gift) and administratively impractical to track; and
4. For business purposes.

It is important to note that there are specific rules for certain other types of employee fringe benefit which are not covered by this article. Those other employee fringe benefits include the following: qualified transportation fringe, no-additional cost service, working condition fringe, qualified employee discount, qualified moving expense reimbursement, qualified retirement planning services, or qualified military base realignment and closure fringe.

Employee side de minimis fringe benefits:

• These are not taxable if they meet those criteria—no income or withholding.

Employer side de minimis fringe benefits:

• Fully deductible as ordinary business expenses.

4. Achievement & Retirement Awards Get Special Treatment

If your gifts are used as achievement awards (e.g., length of service, safety milestones), there’s a separate set of rules under IRC §§ 74(c) and 274(j). These may allow up to $1,600 per employee per year (non‑cash or cash equivalent; clearly certified program required). But, the rules here are detailed and have specific requirements, so it is important to consult with a tax professional when planning to structure achievement awards intended to be treated as non-taxable employee gifts.

Summary & Employer Tips

For both employers and employees, cash and cash-equivalents = taxable compensation.
When using infrequent, non-cash, nominal gifts, it can be a win-win: tax break for employers, tax-free perk for employees.

So, employers:

• Think twice before handing out gift cards—automatically treated as cash.
• Outside of qualified achievement or retirement awards (which should be planned with a tax professional) stick to infrequent, low value (not the proverbial gold watch!), tangible gifts to recognize employees.
• Document purpose, amount, date, and recipient to support deductions.

As always, it’s important to have an experienced tax attorney evaluate the specific facts, circumstances, and applicable law when considering employee gifts that may not fit neatly within the above general rules, such as other fringe benefits (besides the de minimis fringe benefit rule discussed above) or qualified achievement or retirement awards.