Are the Holiday Gifts You Gave Your Employees Taxable Fringe Benefits?
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.
Holidays Gifts Are Taxable Fringe Benefits
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.”
Fringe Benefits and Your Tax Bracket
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.
Fringe Benefits and Withheld Federal Taxes
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?
- For employees who make $1 million or more a year in supplemental wages, the amount over $1 million is subject to withholding at the highest income tax rate for the year, which is 2023 is 37%. For the rest of those wages—the amount under $1 million—the normal withholding rules apply.
- For employees who make under $1 million a year in supplemental wages, there are two options:
- If employees are paid in one lump sum (wages and bonus together), then federal taxes are withheld as part of the regular payroll.
- For companies that pay bonuses separately from regular wages, or if the bonus is paid together with wages, but is clearly documented, the employer can either use a formula based on combined withholding amounts or withhold a flat 22% on the bonus.
Are Company Gifts a Taxable Fringe Benefit?
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!
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