How to Tax—Or Not Tax—Employee Gifts and Prizes

Before you know it, ‘tis the season for office holiday parties and gift giving, both of which can go a long way in terms of promoting employee engagement and boosting morale. While many practice managers go to great lengths to show appreciation to staff members around the holidays, few take into consideration the tax responsibilities associated with giving gifts and prizes to employees. It’s not just during the holidays, either—any type of award, prize or gift given throughout the year needs to be paid close attention to, especially when it comes to taxes.

So, how should you be (or not be) taxing employee gifts? Here are some guidelines to help point you in the right direction.

Taxable Gifts

The first thing to understand about employee gift giving is that not all gifts are taxable. Many are, however, and ignoring taxable events won’t do your practice any favors—especially if gift-giving happens often throughout the year. First things first: Any gift of cash should be labeled as “taxable.” Cash in the form of gift certificates also counts as taxable and is subject to FIT, FITW, FICA and FUTA. Coffee gift cards are common “booster” gifts given to employees for a job well-done, but these are taxable, too. If it acts as cash in any way, you can expect to have to report it as a taxable event.

Nontaxable Gifts

Fortunately, there are a number of different types of gifts that aren’t taxable, which don’t require any extra reporting effort on your part. Fruit baskets, hams, wines, flowers and the like are generally considered de minimis (nontaxable), so long as they aren’t given on a frequent basis. Note that there are grey areas to pay attention to, however. Tickets to a basketball game may not be taxable, but season tickets may be. The key is to ensure that no specific type of gift is given regularly, as this can trigger taxation.

Company Parties

Everyone loves to throw a good holiday party, and many dental practices may actually benefit from doing so (and not just with increased company morale). Holiday parties and similar types of celebrations are 100% deductible to the business as well as being nontaxable to employees and their guests—that is, so long as they’re held infrequently and are designed specifically to promote health, goodwill and/or efficiency within the organization. Company picnics, cocktail hours and other events all fall under this umbrella, which makes a greater case for holding these types of get-togethers throughout the year.  

The tax code can no doubt be confusing. For dental accountants and practice managers, learning how taxation applies to gifts and company events is crucial to running a successful business. Many people overlook just how much of an impact taxation on events and gifts can have on a practice, and some end up learning the hard way that reporting must be accurate each year to avoid potential trouble with the IRS. The more familiar with taxable vs. nontaxable items you can get, the less likely it is you’ll run into any surprises.

eAssist Helpful News and Billing Tips; Edition #122

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