There are many ways to show your employees appreciation, one of them being, gift sending. Corporate gifting has been a great tool for employers to show gratitudes to their employees. And among the gifts, gift cards are one of the most popular and convenient gifts because of their flexibility. But most people often forget that *gift cards are taxable.
One thing about sending gift cards is that it can be a headache for your employees when tax season comes around. The beautiful gesture quickly became something annoying to the employees because they have to file tax for receiving a gift from you.
That’s why many employers are trying to understand if recipients have to pay tax for gift cards they received. Others are looking for alternatives
In this article, Giftpack will go through the details of sending your recipients(employees, clients) gift cards and show examples of how you should withhold your tax to help you fully understand in different kinds of situations.
The fringe benefit
Let’s understand the fringe benefit first
According to IRS, a fringe benefit is a form of payment to employees that is based on the performance of their services. For example, allowing employees to use a business vehicle to commute to and from work, or to visit a client. Another classic example would be the health insurance that is provided to the employees.
Most companies would give fringe benefits (some more, some less depending on their policies) to their employees for costs related to their work. And a lot of them actually do so to increase the general job satisfaction of their employees. Below are a few common fringe benefits:
- Telephone bill reimbursements
- Tuition assistance
- Health insurance
- Childcare reimbursements
- Subsidized cafeteria
- Free transportation for commuting
- Employee discounts
- Employee stock options
Simply put, the IRS has rules on employee gifts and benefits, all of them. A gift card, or gift certificate, is actually a type of fringe benefit because it is something you give your employees in addition to their regular wages.
Since gift cards are categorized as fringe benefits, they are taxable.
How are gift cards taxed?
Since gift cards are a type of supplemental wage, the taxes should be withheld the same way as any other supplemental wages are.
What can you do?
In the US, there are two ways you can withhold federal income taxes on supplemental wages:
The Percentage method: Withhold a rate of 22% for taxes.
The Aggregate method: Add the gift card amount to regular wages and withhold taxes on the combined amount.
Same as the federal income tax, different states have their own supplemental withholding tax rate for state income tax. Withhold Social Security tax (6.2%) and Medicare tax (1.45%), etc.
Check out Patriot’s article to learn more about how to withhold taxes from supplemental income.
Examples
Below we will show you examples of gift card tax withholding for the two ways that we mentioned above (using $100 gift card as an example):
Percentage Method
As mentioned, the withholding rate for sending a gift card to your employee is 22%. So you will first need to multiply the gift card value by 22% to find the federal income tax:
$100 X 0.22 = $22.00
Next step is to multiply the gift card value by 6.2% to find the Social Security tax (unless the employee has reached the Social Security wage base):
$100 X 0.062 = $6.20
Next, multiply the gift card value by 1.45% to get the Medicare tax (unless the employee is responsible for additional Medicare tax):
$100 X 0.0145 = $1.45
Last step is to add up all the tax amounts and subtract from the gift card value of $100:
$100 - ($22.00 + $6.20 + $1.45) = $70.35
This number is the actual value of what your recipient will get from the gift card after all the taxes have been calculated. Of course, the person will get the $100 value gift card, but he/she will have to pay $29.65 of tax later.
Tips: If there are state and/or local income taxes for your business, you should withhold those as well.
Aggregate Method
Again using the $100 gift card as example, you will start by summing the tax rates of 22% (federal income tax), 6.2% (Social Security tax), and 1.45% (Medicare tax):
22% + 6.2% + 1.45% = 29.65%
Then, subtract 100% by the amount:
100% - 29.65% = 70.35%
Finally, you just need to take the $100 and divide it by the percentage you got from the previous step:
100 / 0.7035 = 142.15
To give your employees a gift card with a value of $100 after taxes, record it as $142.15 gross and withhold $42.15 for taxes. That’s it!
Consider these methods, and see which one fits your current needs that best.
So, should you send gift cards as corporate gifts?
Your employees will probably be okay or happy(if you know which stores they go to the most) with getting a gift card from you. But with the complexities surrounding gift card tax withholding, they can be considered not a very ideal employee gift. The additional accounting work to determine what card amount to purchase can be unnecessarily inconvenient. Let alone if the gift card can be purchased in such an unwholesome amount.
On the other hand, you will also need to worry about those employees who don’t really see gift cards as a thoughtful employee gift. To get the most bang for your benefits budget, you will need to do more research on your own employees to better. If you 100% know that a gift card from a specific brand will definitely make your recipient happy, and help you increase your employee engagement, then it is worth the trouble!
If you still have any questions about gift card taxables, or if you have interest in sending gift cards as a corporate gift for your employee, don’t hesitate to book a call with us. We will help you with all we got!