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Employee Gifts: How to Give Tax-Free

Author: Schlereth Date: December 08, 2010

As you decide on an appropriate holiday gift for your employees, it’s important to consider not only what they’ll enjoy but also how taxes will come into play. Because a “gift” is often considered by the IRS to be compensation, it’s important to note the rules so that your employees are not responsible for paying taxes on their gifts. “Get creative so the reward isn't an individual burden to the employee, but a company expense,” says Brent Shelton, spokesperson for FatWallet, Inc., an online shopping resource website based in Rockton, Ill. “That way it stays as a reward.” Here are some options that will ensure your employees won’t face a tax on their holiday gifts.

Give a gift under $25.

Gifts under $25 are tax-exempt, explains Howard Rosen, CPA, president and principal of Tax Services for Connor Ash in St. Louis, Mo. If this is the amount you typically spend on each employee, then you have nothing to worry about.

Tie a gift to an employee award.

You don’t have to worry about taxes if the holiday gift is a reward for service (i.e. highest sales) or longevity (i.e. the employee has been with the company for 10 years). Rosen says you can even create more personalized awards, such as “Most Helpful” or “Best Attitude,” as long as the awards have some kind of consistent format and you give them on an annual basis.

Make a charitable donation.

If your gift to your employees is a charitable contribution in their name, then you don’t have to worry about taxes, no matter the amount, says Rosen.

Give company products or a job performance aid.

If you run the type of business where the employees would enjoy your products (i.e. a clothing store or bakery), then you can give your company products or services as gifts without having to pay taxes on them. And while an employee might not get too excited over office supplies, Shelton says this is a good opportunity to get creative. “Perhaps there could be branded office supplies like an idea journal,” he says.

Give the gift of an outing.

You can take only a group of employees, such as the management team, to an event, and the cost will be tax-free. But, Rosen warns, you cannot take only family members involved with your business and consider it a tax-free company expense.

Facing the Tax

If you opt to go ahead with a gift not listed above that costs more than $25, Rosen recommends “grossing up.” This means you have to be willing to pay the gift amount and also the amount it’s taxed for so that the remaining amount can be given to the employee without he or she worrying about taxes. For example, if you want to give a $100 gift to your employee, you’re likely to end up spending around $135.

Related resources: 3 Ways to Maintain Productivity During the Holidays, and 6 Ways to Motivate Employees by Using Little to No Money, plus more tax tips
 

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