Holiday gifts for employees: Did I just give them a nice holiday turkey or an annoying tax liability?

It's that time of year again . . . time for holiday parties! Perhaps your company is planning one or more holiday parties for your employees, complete with a meal, cocktails, and a small holiday gift for each employee. But wait, you might wonder, will my employees need to report these gifts as compensation? Under the Internal Revenue Code, a gift is normally excluded from income under Section 102(a). But if you read a little farther, you'll realize that employee gifts are not excluded gifts, meaning that if an employer gives a gift to an employee it will not be excluded from the employee's gross income by that section. All hope is not lost, however, as Section 132(a) excludes de minimis fringe benefits from employees' incomes. Such benefits include property or services when the value (after taking account the frequency with which they are given) is so small as to make accounting unreasonable or administratively impracticable. The IRS has not imposed any specific dollar limit on these benefits, but the regulations provide some guidance. The following are some examples of gifts to employees that will not be considered income:

• occasional cocktail parties, group meals, or picnics for employees and their guests;

• traditional birthday or holiday gifts of property (not cash) with a low fair market value;

• occasional theater or sporting event tickets;

• coffee, doughnuts, and soft drinks;

• flowers, fruit, books, or similar property provided to employees under special circumstances (e.g., on account of illness, outstanding performance, or family crisis).

As an example of a holiday gift of property with a low fair market value, the legislative history indicates that a turkey given for the year-end holidays would qualify; and the IRS has provided, If your employer distributes turkeys, hams, or other items of nominal value at Christmas or other holidays, the value of those gifts is not income. It also appears from the regulations that employees won't need to worry about paying taxes on the value of that holiday meal their employer is providing (assuming it is reasonably priced), or the value of a couple of cocktails at a holiday cocktail party. From the list above, then, taxpayers have some guidance on the value of goods that will be considered de minimis. But beware of cash and cash equivalents (such as gift certificates and gift cards). These items cannot be excluded as de minimis fringe benefits and are therefore considered compensation to employees. Additionally, Congress and the IRS have stated that frequency is important. While gifts can be given occasionally, for holidays and special occasions, if gifts are provided every month, for example, the exclusion may not be available. 

About the Tax Café Blog: The Tax Café was created as a forum where we can share our ideas, updates, and insights into the world of tax law. While paying taxes isn’t all that exciting, reading about them can be! Many government policies are accomplished through tax laws (even the choice not to tax something or someone), and it is something that affects all of us. We hope you’ll stop by, find an interesting article or two, and stay a while.  While many of our posts deal with legal issues of state and federal tax law, this blog does not offer legal advice. If you need legal advice concerning your tax liability, please consult with a tax lawyer.