Are gift cards taxable employee benefits?

As an employer, showing your employees appreciation for their hard work is crucial. After all, improving your employees’ experience and job satisfaction helps reduce turnover. One way to show your staff you care is with perks like gift cards.

Gift cards are a simple way to recognize and reward your employees. But before you buy a gift certificate for everyone on your team, there are a few things you need to know.

You may wonder what the rules on gift cards are and what you must legally do to give out gift certificates. This blog post will explain employee fringe benefits, whether gift cards are taxable, and your other perk options.

In this blog post, you’ll learn:

• The tax implications of gift cards.
• The difference between taxable and tax-free fringe benefits.
• The flexible alternative benefits to gift certificates.

Is a gift card a fringe benefit?

Gift cards and gift certificates aren’t formal employee benefits like group health insurance or health reimbursement arrangements (HRAs). Instead, the IRS considers them fringe benefits. “Fringe benefit” can refer to any employee benefit, but the IRS uses it to categorize certain informal benefits in Publication 15-B¹.

A fringe benefit can be taxable or tax-free, depending on how the IRS classifies it. If a fringe benefit is taxable, it may be subject to federal income taxes, Social Security, Medicare, and federal unemployment tax (FUTA).

Examples of nontaxable fringe benefits include:

• Certain commuter benefits
• Accident and health benefits
• Help with education (up to $5,250 per year)
• De minimis benefits
• Group-term life insurance (up to $50,000 of coverage)
• Working condition benefits
• Employer-provided cell phones for business purposes

Do employees have to pay taxes on gift cards?

If you give your employees a gift card, the IRS considers it a cash-equivalent fringe benefit. This means you must report the card's value on their Form W-2 as wages so they can pay income taxes on the amount. This is the same for other taxable fringe benefits, like employee stipends, which you must also report as regular wages on employees' W-2s.

You must withhold federal income tax, Social Security tax, Medicare tax, and FUTA. You must also withhold state income taxes if gift cards are taxable in your state. A $100 gift card may only equal $72 after tax withholding.

“To properly handle gift card taxation, employers should keep accurate records of which employees received which cards, including their issue dates and values,” said David J. Greiner, Esq., President of Greiner Law Corp. “At year’s end, total each employee’s gift card value and report that figure as extra wages on their W-2. Though employees must pay income tax on the gift cards, businesses may deduct the amounts as employee compensation expenses.”

What are de minimis benefits?

A de minimis fringe benefit is a perk you offer to an employee infrequently and that’s of little value. You don’t have to include de minimis benefits in your employees’ taxable wages.

According to IRC Section 132, de minimis benefits include:

• The occasional use of an office photocopier
• Occasional snacks, coffee, or other food and drink
• Occasional event tickets
• Holiday gifts and birthday presents, as long as they’re not cash gifts and have a low fair market value
• Group-term life insurance for a spouse or dependent under $2,000 face value
• Inexpensive items such as flowers, fruit, and books
• Personal use of an employer-provided cell phone
• Occasional employee parties or picnics

Based on the examples, you may think a gift card is a de minimis fringe benefit since it can be a small gift with a low amount. But, gift cards are cash equivalents. Cash is only a de minimis benefit if it’s for occasional meal money or to pay transportation fees for your employees working overtime.

Some gift certificates may be a de minimis benefit if you give them to your employees to buy a specific low-value item of personal property. The IRS grants these tax exceptions on a case-by-case basis. So consult with your tax professional to ensure you're following federal regulations.

“Some employers try taking advantage of the exceptions for gifts under $500 rule,” Greiner said. “But to qualify, these must be occasional, infrequent employee gifts. Regularly providing gift cards, even under $500, is taxable income. It’s best to treat all gift cards as taxable to avoid issues with the frequency or consistency of the gifts. When unsure, consulting a tax advisor provides clarity and ensures compliance.”

Should you offer gift cards to employees?

Your staff would likely be happy with any gift card they receive. A recent survey found that 80% of workers would prefer a gift card as a reward from their employer². But look at the big picture.

Tax withholding can be tricky, and extra accounting work to determine what card amount to buy can be a headache—especially if you’re a small employer with limited HR and accounting teams. So, the administrative burden of gift cards may not make them your best option.

While they’re a nice perk occasionally, gift cards won't make your compensation package enticing. Employees don’t see them as actual benefits like healthcare or a retirement account. To get the most bang for your buck, you’re better off choosing a more robust employee benefit. Let's go over the alternatives below.

Alternatives to gift cards

If you want to give your staff the same flexibility as a gift card without the added complexity, consider an employee stipend. Stipends are a fixed amount of money you offer employees to pay for various expenses.

Stipends allow employees to receive money for various expenses, such as:

• Health
• Professional development
• Transportation costs
• Meals
• Education
• Childcare
• Reward and recognition

With a stipend, you set a monthly allowance for employees, like a gift card balance. If you don’t want to offer a recurring monthly allowance, you can give your employees a one-time stipend of any amount, like providing a one-time gift card.

Stipends are more formal employee benefits than gift certificates. But, the IRS still considers them taxable benefits. However, they offer far greater benefits to employees in terms of personalization and flexibility than gift certificates.

Is the sale of gift cards taxable?

Many employers and individuals may also wonder if they have to pay sales taxes on gift cards when they purchase them. States determine their sales tax rules, so this will differ based on where you live. Most states don’t have a sales tax on gift cards. But some, like Washington, have them for specific electronic gift cards³.

Conclusion

Offering gift certificates is a great way to boost employee engagement and show your staff your appreciation. But, you must report them on an employee’s Form W-2 as supplemental wages and withhold federal taxes according to IRS regulations.

Employee stipends are a better option for business owners looking to offer customizable benefits. Even though stipends are taxable, they can attract and keep top talent, please your current employees, and grow your business.

This article is for informational purposes only and shouldn’t be relied on for tax or legal advice. Work with a tax professional to determine your specific liabilities.

This blog article was originally published on June 1, 2022. It was last updated on September 9, 2024.

1. https://www.irs.gov/publications/p15b

2. https://www.carat.fiserv.com/content/dam/carat/us/en/pdf/carat-fiserv-q4-2023-gift-card-gauge.pdf

3. https://www.krem.com/article/news/verify/gift-cards-tax-verify/293-c8de6f7e-4af5-4e46-8d18-b9323d6e105f