Gift cards are a great way to give someone the gift of choice, but they can also be confusing.
You might think that you’re getting out of paying taxes on your holiday gifts because it’s not cash…but you’d be wrong!
Are Gift Cards Taxable? Yes, Gift cards are taxable. As per the IRS, cash gifts, including gift cards for your friends and family members, are taxed as wages unless they’re specifically excluded by a section of the Internal Revenue Code.
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We’ve put together this easy reference guide so you can make sure your gifts don’t surprise you with an unexpected tax bill next year.
Are Gift Cards Taxable?
The Internal Revenue Code excludes gift cards and gift certificates redeemed by the recipient at certain merchants. For example, if you give someone a Wal-Mart gift card, it is not taxable because Wal-Mart does NOT report the value of your gift to the IRS.
Despite the new rules, employers are still able to provide many benefits that would previously have been considered de minimis and therefore exempt from taxation. These include tickets for theater or sports events; traditional birthday presents with low fair market value (not cash); flowers, Other examples of goodies provided could be occasional break treats such as soft drinks at work meetings etc
The employer, for example, may give workers a modest presence on the employee’s birthday or a holiday turkey or ham without causing any problems for the employee. However, if the employer provides an employee with a gift certificate that may be used to purchase anything other than professional services, the amount of the gift certificate is considered taxable income to the employee.
As per the information on the IRS website, Under Internal Revenue Code section 132(a)(4), minor benefits are excluded, which include goods that are not specifically covered by other sections of the Code. These items, among others, are:
- Controlled, occasional employee use of a photocopier
- Cookies and pastries, muffins, doughnuts, etc. are occasionally served as a snack or post-workout treat.
- Occasional tickets to staff for any entertainment events or movies
- Holiday gifts
- Money for staff working overtime, money for a meal or transportation.
- Employee spouse or dependent life insurance with a face value of no more than $2,000 is grouped together.
- Flowers, fruit, reading material, and other items are available under certain conditions.
- An employer’s provision of a cell phone for personal use is primarily for business purposes.
If a benefit is de minimis, you must consider its frequency and value. The importance of being occasional or unusual in occurrence is an essential component of a de minimis benefit. It also can’t be disguised compensation.
The Gift of Cash and Gift Certificates
A token that pays you in cash is never a de minimis fringe benefit and is always taxable, regardless of how little the payment is. This is because it is not difficult or inefficient to account for cash since the value of the funds given is immediately apparent.
Gift certificates for money are taxable because, like cash, it’s not difficult to value them. Employers who reimburse workers with gift certificates must treat the reimbursement as wages and include the fair market value of the certificate in the worker’s gross income.
The Internal Revenue Code excludes certain gift certificates or cards from taxation if they meet specific rules governing how they’re used. The exclusion applies to gift certificates or cards redeemable for goods (or at a discount), but only if the holder of the certificate or card must give it up upon purchase of goods or services.
If you receive money as compensation for your labor, the Internal Revenue Code will not let you avoid paying taxes by giving that money to someone else instead. Any time you receive money for your labor, it is considered taxable income.
If the person who gives you the gift card or gift certificate is not paying you for any specific service, then none of what they give to you qualifies as a de minimis fringe benefit under the Internal Revenue Code.
Calculating taxes Gift Cards.
A gift card is a form of extra money. As with any other supplemental pay, you must taxes on gift cards the same way.
If an employee receives a gift card for their services, you should withhold federal income, Social Security, and Medicare taxes from the value of the card. If required by law, you may also have to deduct state income tax.
In one of two ways, you may avoid federal income taxes on supplemental pay—also known as gift cards:
- Percentage method: For taxes, withhold a fixed rate of 22% instead.
- Aggregate method: To regular pay, add the gift card amount and taxes on the total.
Many states, like the federal government, have their own supplementary withholding tax rate for state income taxes. Like regular, withhold Social Security ( 6.2% ) and Medicare (1.45%) at the same rate.
Let’s assume that you would like to give an employee a $200 gift card for the holidays. For federal income tax, you choose to use the percentage method.
Follow these steps to calculate how much to deduct from the gift card for taxes:
- To calculate the federal income tax, first, multiply the gift card value by 22 percent:
$200 X 0.22 = $44.00
- To calculate the Social Security tax, multiply the gift card amount by 6.2 percent:
$200 X 0.062 = $12.40
- Then multiply the gift card value by 1.45 percent to calculate the Medicare tax (unless the employee is responsible for additional Medicare tax):
$200 X 0.0145 = $2.90
- Finally, add up all of the tax rates and subtract $200 from the gift card value:
$44.00 + $12.40 + $2.90 = $59.30
$200 – $59.20 = $140.80
- If you have state or local income taxes, deduct them. So, after federal income, Social Security, and Medicare taxes are paid, your employee will get a gift card for $140.80.
Gift cards are taxable, but there is a way to give them without paying taxes. If you want to avoid the tax burden of giving your friends and family members gift cards, make sure they can only be redeemed at certain merchants where it’s not reported by the company. That way, your recipients won’t have to pay taxes on the card as income.