Cash or items equivalent to cash provided by the employer are never excludable from income. An exception applies to the occasional money for meals or transportation fees to allow an employee to work beyond normal hours. Gift certificates that can be redeemed for general products or that have an equivalent cash value are not de minimis benefits and are subject to taxes. Most donations to employees are taxable.
If it is taxable income for the employee, you must withhold federal, state and local income taxes and deduct the employee's share of FICA taxes (Social Security and Medicare taxes). You must also pay unemployment tax on these amounts. This is something that the IRS is very clear about. Even if the employer gives them as a holiday or birthday gift to an employee, these types of gifts are never considered de minimis supplemental benefits and are therefore taxable.
This is probably due to the fact that gift cards could reasonably be assumed to be salaries in disguise. Anything that is a cash equivalent will generally be considered a salary in disguise and may be counted as taxable income that should appear as part of an employee's income. The guidance indicates that the donation of Christmas hams by an employer to employees qualifies as exclusive de minimis supplemental benefits; however, the amount of gift certificates that an employer gives to employees to buy the hams themselves is taxable income. When it comes to Christmas gifts and prizes between those ranges, employers must use their judgment to decide whether the gift or prize is excludable from employee income as an additional de minimis benefit.
The type of gift you're giving, when you're giving it, and who you're giving it to all play an important role in determining if gifts are taxable. The IRS maintained that the gift certificate was not minimal because it is not administratively impractical to account for gift certificates. In its explanation of additional de minimis benefits, the IRS distinguishes between gift certificates that can be redeemed for general products and gift certificates that allow an employee a specific item of personal property. Whether or not employee gifts are taxable depends on the specific characteristics of the gifts you give, when you give them, and who receives them.
Non-cash gifts that aren't gift cards are great as rewards for employee achievements or to celebrate milestones in the length of service.
