Most donations to employees are taxable. If it is taxable income for the employee, you must withhold federal, state and local income taxes and deduct the employee's share of FICA taxes (Social Security and Medicare taxes). You must also pay unemployment tax on these amounts. The IRS maintained that the gift certificate was not minimal because it is not administratively impractical to account for gift certificates.
While people would enjoy a tax-deductible charitable contribution for the gift and employees would prefer that the donation not be taxable for them, this type of “double immersion” is not usually the result. While donations to employees have their own limitations and can be treated as taxable compensation, the employer can generally deduct the full cost of donations made to employees. In some situations related to donating tickets for sporting or other events, the taxpayer can choose between requesting the deduction as a gift or as entertainment. The guidance indicates that the donation of Christmas hams by an employer to employees qualifies as exclusive de minimis supplemental benefits; however, the amount of gift certificates that an employer gives to employees to buy the hams themselves is taxable income.
When it comes to Christmas gifts and prizes between those ranges, employers must use their judgment to decide whether the gift or prize is excludable from employee income as an additional de minimis benefit. In its explanation of additional de minimis benefits, the IRS distinguishes between gift certificates that can be redeemed for general products and gift certificates that allow an employee a specific item of personal property. Before you start asking for gifts for special occasions, thank you or Christmas, make sure you fully understand how the gift will affect your company and your employees' taxes. Whether it's a gift to thank for being a valued customer or for a vacation, the good news is that donations to customers are tax-deductible, but have limits.
If the gift is not taxable for the employee, the gift must be reasonable in order to be deducted as a business expense.