Are the Holiday Gifts You Gave Your Employees Taxable Fringe Benefits?
The Blue dot Team
The Blue dot Team
2023 has just begun and many people are still going through the 2022 holiday gifts that they received. Is a gift really a gift, or is it a taxable fringe benefit? Or both? Let’s dive into holiday gifts and taxes from the corporate finance perspective.
Many companies give their employees end-of-the-year bonuses. Whether the gift is cash or crypto, companies and employees are required to report gifts as taxable employee/fringe benefits. According to US laws, gifts are taxable the same as any income. Fringe benefit taxes can be a headache for finance teams to comply with.
IRS Section 451 General Rule For Taxable Year Of Inclusion states that “an item of gross income is received by the taxpayer if it is actually or constructively received, or if it is due and payable to the taxpayer.”
What if an end-of-the-year bonus puts an employee “over the top” and into the next higher tax bracket? The simple answer is the higher tax rate only applies to the part of the bonus that is above the employee’s current tax bracket.
A company gift or bonus cannot cause an employee to move to a higher tax bracket.
When a company pays its employees, the company withholds federal income tax. Withholding federal taxes applies to bonuses and gifts as well, but this is where things can get confusing. US companies often put bonuses, commissions, overtime pay, awards, severance pay, and other fringe benefits into a category that is called “supplemental wages.” Supplemental wages can be defined as “everything besides salary wages.”
How much should an employee withhold for supplemental wages?
The IRS considers most gifts made to employees compensation. What are the exceptions to this rule?
Small gifts that a company gives employees, such as chocolates, fruit baskets, etc. are considered to be “de minimis” – of minimal value – and are therefore not taxable.
What about a company party, is that taxable to employees? According to Bloomberg Tax, “A holiday party for the benefit of all employees is considered a recreational, social, or similar activity and is deductible.”
Now you know – the yearly company get-together is not a taxable event, but all of the bonuses that are handed out to employees are taxable fringe benefits!
Blue dot helps companies to overcome the challenges inherent in corporate fringe benefits, leveraging artificial intelligence (AI) and machine learning (ML) to establish effortless fringe benefits tax compliance. Blue dot Taxable Employee Benefits helps businesses to comply with IRS fringe benefits regulations, powered by automation, enabling companies to gain full visibility over employee fringe benefits.
Get a head start on 2023 by automating your taxable fringe benefits with Blue dot!