As an employer, it’s crucial to provide benefits to your employees and show your appreciation for their hard work. After all, improving your employees’ experience and job satisfaction helps reduce employee turnover.
Gift cards are a simple way to give your employees a token of appreciation, whether as a present or an employee reward. But, before you make a gift card purchase for everyone on your team, there are a few things you need to know.
You might be wondering, is there tax on gift cards? Are there any rules your organization needs to follow to distribute a gift certificate legally?
This article will explain employee fringe benefits, whether gift cards are taxable for employees, and what alternatives are available.
Is a gift card a fringe benefit?
Since a gift certificate isn’t a formal employee benefit, such as group health insurance or a health reimbursement arrangement (HRA), the IRS considers it a fringe benefit. A fringe benefit is a term that refers to any employee benefit, but the IRS uses it to categorize certain informal benefits in Publication 15-B.
Fringe benefits can be taxable or tax-free, depending on how the IRS classifies the benefit. If a fringe benefit is taxable, it may be subject to federal income taxes, Social Security, Medicare, and federal unemployment tax, or FUTA.
There are also nontaxable fringe benefits, such as certain commuter benefits and education benefits. De minimis benefits are also excluded.
Is there tax on gift cards?
Yes, gift cards are taxable when offered to employees. The IRS considers it as cash-equivalent, meaning you must report the card's value on an employee’s Form W-2 just like a wage.
This is the same as taxable fringe benefits such as employee stipends, which must also be reported as wages on employees' W-2s.
Employers must withhold federal income tax, Social Security tax, Medicare tax, FUTA, and any state income taxes if gift cards are taxable in your state. In practice, this can look like offering gift balances of $72 instead of $100, for example, to make up for tax withholding. Or, it can mean accounting for more than the card's value if you want employees to receive the total $100.
What are de minimis benefits?
A de minimis fringe benefit is something offered to an employee that’s of little value and offered infrequently.
According to IRC Section 132, de minimis benefits include:
- Occasional use of an office photocopier
- Occasional snacks, coffee, or other food and drink
- Occasional tickets for events
- Holiday presents
- Occasional compensation for meals or a transportation expense that allow employees to work overtime
- Group-term life insurance for a spouse or dependent under $2,000 face value
- Inexpensive items such as flowers, fruit, books
- Personal use of an employer-provided cell phone
Based on the examples, you might assume that a gift card is a de minimis fringe benefit since it can hold little value and might count as a small gift. However, the IRS excludes cash and gift certificates from being counted as de minimis benefits unless they are provided solely as occasional meal money or for transportation fees so that your employees can work overtime.
That’s because the cards have a cash value, which is a direct form of payment.
But, some gift certificates may count as a de minimis benefit if you provide them to purchase a specific item that holds a low value. The IRS grants these tax exceptions on a case-by-case basis, so you’ll want to consult with your tax professional.
Should you offer gift cards to employees?
With the complexities surrounding gift card withholding, they aren’t an ideal employee benefit. While your employees will likely be okay with any amount they receive, the additional accounting work to determine what card amount to purchase can be an unnecessary headache.
Not to mention employees don’t really see gift cards as a true employee benefit like they do health care or a retirement account. To get the most bang for your benefits budget, you’re better off choosing a more formal employee benefit.
Thankfully, there are alternatives to offering gift cards to your employees.
Alternatives to gift cards
You should offer your staff an employee stipend if you want to offer the same flexibility as a gift card without the added complexity.
Employee stipends enable your employees to submit requests for reimbursement for various expense categories such as health, wellness, and remote work. You simply set a monthly allowance available for reimbursement, like a gift card balance, and approve expenses up to that amount.
Health stipends allow you to reimburse employees for their medical costs, including insurance premiums, out-of-pocket expenses, and mental health needs. Health stipends are similar to HRAs, except you can reimburse employees for more expenses than those listed on IRS Publication 502.
You can reimburse employees for their wellness expenses and activities with a wellness stipend. This can help your employees live a healthier lifestyle, destress, and ultimately become more productive at work.
Possible expenses that you can reimburse with a wellness stipend include:
- Exercise classes
- Exercise equipment
- Gym or studio memberships
- Wearables and devices
- Wellness mobile apps
Remote work stipends are another excellent option for organizations with remote employees. By offering a monthly allowance for remote work, your employees can get reimbursed for their home internet access, cell phone bills, and home office setup. This ensures that your remote workers have all the tools and bandwidth needed to do their jobs effectively.
One downside to stipends is that, like gift certificates, they’re taxable. However, they carry far greater benefits to your employees and your organization.
While offering gift certificates is a great way to boost employee engagement and show your employees your appreciation, they need to be reported on your employees’ W-2s as supplemental wages, and you must withhold taxes.
Employee stipends are a better option for organizations looking to offer taxable, personalized benefits on a regular basis. You can attract and retain top talent, engage your current employees, and grow your business by offering a stipend.
If you’re ready to offer personalized employee benefits, PeopleKeep can help! Our HRA and employee stipend administration software helps organizations like yours manage their benefits in just a few minutes each month.