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. In addition to the annual gift tax exclusion, people who make donations should know the basic amount of the exclusion.
There is no set limit for gifts to a company (for example, a gift basket for all members of a customer's team to share) as long as the costs are “reasonable”. 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. 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. Cash gifts and cash equivalents, such as gift cards, are included in the employee's income and are subject to payroll tax withholding, regardless of how small and rare they are.
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. Non-monetary gifts and prizes awarded to employees can only be considered tax-free if the gift or award can be characterized as an additional “de minimis” benefit under Section 132 of the Code, or if it qualifies as an “employee achievement award” under Section 274 (j) of the Code. Cash is always taxable and must be included in an employee's W2 salary, so a gift card or gift certificate may seem like the preferred option. The IRS maintained that the gift certificate was not minimal because it is not administratively impractical to account for gift certificates.
