With the holiday season underway, many clubs may be planning on giving gifts to their employees. Clubs should keep in mind the Internal Revenue Service (IRS) rules regarding gifts to employees. A club’s method of gift-giving usually determines whether or not holiday gifts will be viewed as taxable wages.
The IRS considers holiday gifts such as turkeys, hams and other low-cost items to be of small value. Accordingly, they are not subject to income and Social Security tax withholdings (FICA) or employer unemployment tax payments (FUTA). The club may also deduct the cost of these items as a business expense.
However, if a gift represents compensation to an employee, the value of the gift must be treated as wages and is subject to FICA and FUTA taxes. For example, many clubs organize a holiday fund for employees, taking donations from members. The IRS does not consider money distributed from this type of fund to be a gift from the club or a gratuity from the members; rather, this type of gift is defined as wages. As such, the club must withhold income and FICA tax, and make FICA and FUTA payments on them. (Note: Cash gifts should not be used to compute overtime wages. A cash gift given during a week when an employee works overtime is not included as part of the regular hourly wage rate when computing overtime.)
Clubs should note that the IRS tells employers that all fringe benefits, including gift certificates, are considered taxable wages unless specifically excluded by a section of the IRC. Employers may still provide some perks to employees that can be considered de minimis and not taxable. These can include group meals, tickets to the theater or sporting events, traditional birthday gifts or holiday gifts with a low fair market value (not cash or cash equivalent), flowers, and occasional break treats, such as coffee, doughnuts, soft drinks, etc. The IRS has created a Taxable Fringe Benefit Guide that addresses these fringe benefits in addition to all other taxable fringe benefits employers might provide. The Employer’s Tax Guide to Fringe Benefits, Publication 15-B is another IRS resource clubs may reference regarding questions related to tax issues on employee fringe benefits.