Are you planning to say “thank you” to your hard working employees this holiday season? It certainly makes sense to do something special for the people who work hard every day to make your company a success with a little something extra during the holidays. However, before you decide what to give to your team members, it’s important to stop and think about the tax implications of your actions.

Non-Monetary Gifts
If you give workers something that does not have direct monetary value, such as a fruit basket, turkey, ham, box of mixed nuts, or other traditional holiday appreciate gift, however, such items are not considered taxable income. And, further, as an employer, you can take a tax deduction of up to $25 per employee for monies spent to purchase such items.

Giving Money to Employees
Many times, employers feel that their employees would rather have money to go and choose what they want rather than receiving a gift that the employer has chosen. This many be true, but according to the Internal Revenue Service (IRS) there’s a big difference in giving a token item to employees and providing employees with something that has direct cash value, whether that gift is actual cash, a gift card, or even traveler’s checks.

While not everything that a small business owner might give to employees is taxable, it’s a fact that any money – regardless of form — that passes hands from an employer to his or her employees is taxable to the employee. So, while it might stand to reason that the best gift for employees is cash or a gift card, it’s also a fact that this type of gift is taxable and must be factored into each worker’s gross wages for taxation purposes.

Accounting Considerations
For a small business owner, giving cash gifts to employees can create an accounting hassle. The additional monetary amount given will have to be reflected in the company’s payroll documentation. If the money is given as cash added to an employees check, it can simply be entered into payroll as a bonus. However, if it is given in the form of a gift card, the dollar value of the gift card will have to be added to taxable wages and taxes withheld and paid on that amount, even though the amount of money isn’t actually being distributed through a check. If you do payroll yourself, this adds processing difficulty. If you outsource payroll, it can even add expense to the fees your payroll company charges to handle your documentation.

Actual Cost Considerations
When making a gift of cash to employees, the gift ends up costing the employer more than the amount of the gift, because the increase gross wage value increases FICA withholdings and unemployment insurance premiums.  The employee, while likely to be glad to receive any extra money, won’t receive the full value of the gift because taxes have to be paid on the funds. In some cases, the gift may even move the employee into a higher tax bracket, resulting in an increased percentage of income tax due on all wages earned.