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Are Gift Cards Taxable To Employees

Do I Need To Pay Tax On Gift Money From Overseas In Canada

Gift Cards become Taxable Income when gifted to an Employee {Be Compliant How to run the payroll}

Canadian authorities do not regulate or tax most gifts of cash sent into the country. In short, residents can receive as much cash as theyd like without triggering a gift or capital gains tax. Because of this, you shouldnt have to deal with cumbersome legal documents after accepting your remittance.

Are Employee Gifts Taxable Everything You Need To Know

If youre reading this, chances are youre experiencing mild panic over the question of whether or not gifts youve provided your employees are taxable.

Every year we field tons of questions about this subject from people who did an awesome thing for their employees, only to realize they didnt think about whether accounting needed to be notified of their expenditures. From holiday gifts, to tickets to sporting events for meeting company milestones, everyone wants to know: what are the tax implications for employee gifts?

The bad news is that the Internal Revenue Service explains the answer to this seemingly simple question with a 4,000 page tax document that only CPAs can make heads or tails of. But the good news is that our in-house tax expert broke it down so we can give you everything you need to know in one short post!

Before we go any further, please note that this post applies to businesses located in the US. If youre located outside of the US, different tax codes will apply. We also recommend speaking to your business accounting professional as each case will vary based on several factors.

That being said, heres what you need to know about the IRS guidelines around employee

The difference between employee gifts and compensation

Employee gifts are tax-exempt when they are considered de minimis fringe benefits

Being buried in the tax code is not enough: the answer to your question must also contain Latin.

Some of the examples they include are:

Got it?

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Premiums Under Provincial Hospitalization Medical Care Insurance And Certain Government Of Canada Plans

You may be paying premiums or contributing to a provincial or territorial hospital or medical care insurance plan for an employee. The amount you pay is considered a taxable benefit for the employee. Report this benefit in box 14, “Employment income,” and in the “Other information,” area under code 40 at the bottom of the employee’s T4 slip. If you have to make payments to such a plan for amounts other than premiums or contributions for the employee, they are not considered a taxable benefit for the employee.

If you are the former employer of an employee who has retired, any amount you pay as a contribution to a provincial or territorial health services insurance plan for the retired employee is a taxable benefit.

Report this benefit under code 118, “Medical premium benefits,” in the “Other information” area at the bottom of the T4A slip.

Any amount that the federal government pays for premiums under a hospital or medical care insurance plan for its employees and their dependants serving outside Canada is a taxable benefit. This also applies to dependants of members of the Royal Canadian Mounted Police and the Canadian Forces serving outside Canada.

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Is This Guide For You

Use this guide if you are an employer and you provide benefits or allowances to your employees, including individuals who hold an office, for items such as:

  • automobiles or other motor vehicles
  • board and lodging
  • group term life insurance policies
  • interest-free or low-interest loans
  • transit passes
  • tuition fees

If you or a person working for you is not sure of the workers employment status, either one of you can request a ruling to determine the status. If you are a business owner, you can use the “Request a CPP/EI ruling” service in My Business Account. If you are an individual, you can use the Request a CPP/EI ruling service in My Account for Individuals. You can also fill out and mail Form CPT1, Request for a CPP/EI Ruling Employee or Self-Employed? to the CPP/Rulings Division at the Tax Services Office in the province or territory of your residence or place of business. See the table found on Form CPT1 for the mailing addresses. For more information on employment status, see Guide RC4110, Employee or Self-Employed?

A benefit or allowance can be paid to your employee in cash or provided to your employee in a manner other than cash .

You may have to include the value of a benefit or allowance in an employee’s income, depending on the type of benefit or allowance and the reason you give it.

This guide explains your responsibilities and shows you how to calculate the value of taxable benefits or allowances.

Power Saws And Tree Trimmers

Tax

If you are an employer in the forestry business, you may have employees who, according to their contracts, have to use their own power saws or tree trimmers at their own expense.

Rental payments you make to employees for the use of their own power saws or tree trimmers are taxable benefits, and should be included in their income on a T4 slip. Their income should not be reduced by the cost or value of saws, trimmers, parts, gasoline, or any other materials the employee supplies.

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Employment Insurance Premium Rebate

As an employer, you may be eligible for a reduction in the employer EI premium rate that you use to calculate your share of the EI premiums if you offer income protection coverage, such as a wage loss replacement plan or other income maintenance plan, to your employees that reduce the EI benefits payable to an employee. For more information, go to How to reduce the EI premium rate if you provide your employees with a short-term disability plan.

If you are granted an EI premium reduction, you will calculate your employer’s EI premiums using a rate that is lower than the standard employer rate of 1.4 times the employees’ EI premiums.

You have to return 5/12 of any savings to your employees in the year in which you received the EI premium reduction, or within the first four months of the following year. This savings can either be given to your employee in cash, such as a cash allowance or a cash rebate, or indirectly through increased employer contributions to an employee’s health and welfare trust, group sickness or accident insurance plan, private health services plan, or in any other manner. These indirect benefits will only be tax-free if they are given to the employee in the form of a benefit specifically exempt from taxation under paragraph 6 of the Income Tax Act.

Note

If the benefit is taxable, you must include it in your employee’s income in the year the employee received it. For more information, see Benefits chart.

The Gift Of Gift Cards: De Minimis And Reporting Rules

Article

By Angie Ziegler, CPP

Its the holiday season, and employers are already out shopping for the perfect gift for their staff. A gift card can be a great way for both businesses and individuals to show appreciation. However, if your organization gives gift cards to staff, there are steps you must follow to ensure youre compliant with IRS rules.

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The People Factor What Your Employees Want

When asked how they would like their employers to show appreciation, employees said:

  • 27% cash
  • 14% employee training and advancement opportunities
  • 12% movie or event tickets
  • 8% flexible parental leave or telecommuting days
  • 6% massages

It’s worth noting that a significant number of workers indicated they simply long for a thank-you from their boss.

The holidays provide the perfect time for businesses to set themselves apart and attract great talent by recognizing their employees hard work.

Express Employment Professionals CEO Bob Funk

Disclaimer: The advice we share on our blog is intended to be informational. It does not replace the expertise of accredited business professionals.

Are Gift Cards Taxable To Employees

Are gifts and awards taxable benefits?

Yes, gift cards are taxable to employees. So, to ensure your employees don’t miss out after paying tax, its important to gross-up on the amount given. This means covering the amount that they will have to pay in taxes, on top of the price of the gift card, to ensure they get the full value from your gift.

There are some ways in which no tax is required on gift cards. For example, don’t choose gift cards with a monetary value, instead give a gift card that is only redeemable against a product for example, a Christmas ham in the holiday season. This means there is no monetary value on the card, it can only be used for one thing and therefore won’t need to be accounted for in an employee’s tax return.

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Employee Allowances And Reimbursements

You also provide employees with nontaxable allowances and reimbursements, such as for the business use of a vehicle, provided you follow the CRA’s per-kilometer allowance guidelines. Nonreasonable per-kilometer rates will be considered a taxable benefit.

Payments for travel expenses, such as meals, for activities conducted on behalf of the business also are allowed. Employees must keep track of the expenses and submit an expense report, with receipts, to the employer. Employers may give employees an advance for expenses.

    Cancel Or Waive Penalties Or Interest

    The CRA administers legislation, commonly called taxpayer relief provisions, that allows the CRA discretion to cancel or waive penalties or interest when taxpayers cannot meet their tax obligations due to circumstances beyond their control.

    The CRAs discretion to grant relief is limited to any period that ended within 10 calendar years before the year in which a request is made.

    For penalties, the CRA will consider your request only if it relates to a tax year or fiscal period ending in any of the 10 calendar years before the year in which you make your request. For example, your request made in 2020 must relate to a penalty for a tax year or fiscal period ending in 2010 or later.

    For interest on a balance owing for any tax year or fiscal period, the CRA will consider only the amounts that accrued during the 10 calendar years before the year in which you make your request. For example, your request made in 2020 must relate to interest that accrued in 2010 or later.

    To make a request, fill out Form RC4288, Request for Taxpayer Relief Cancel or Waive Penalties or Interest. For more information about relief from penalties or interest and how to submit your request, go to Cancel or waive penalties or interest.

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    Is There Tax On Gift Card

    Yes, gift cards are taxable. According to the IRS, gift cards for employees are considered cash equivalent items. Like cash, you must include gift cards in an employees taxable incomeregardless of how little the gift card value is.

    But, there is an exception. You might be able to exclude gift cards you give employees for a specific item of minimal value . Check with a tax professional if you have questions about whether you need to withhold taxes on gift cards.

    For all other gift cards, record the value and pay the appropriate amount of taxes.

    Now that you know gift cards are taxable, you can avoid making the mistake of giving them to employees without first withholding taxes. Worried about making other payroll errors? Check out our FREE whitepaper, 10 Common Payroll Mistakes You Dont Want to Make, to help you stay compliant.

    Board And Lodging Allowances Paid To Players On Sports Teams Or Members Of Recreation Programs

    Employee Gift Cards Don

    You can exclude up to $377 per month from income for a board and lodging allowance for a participant or member of a sports team or recreational program if all of the following conditions are met:

    • you are a registered charity or a non-profit organization
    • participation with, or membership on the team or in the program is restricted to persons under 21 years of age
    • the allowance is for board and lodging for participants or members that have to live away from their ordinary place of residence
    • the allowance is not attributable to any services, such as coaching, refereeing, or other services to the team or program

    Do not report the excluded income on a T4 slip.

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    What Is A Trivial Benefit

    In April 2016, HMRC introduced trivial benefits to allow businesses to gift staff small perks, such as birthday and Christmas presents, without paying tax or national insurance on them. Up until that point you would have found yourself recording every gift you gave employees on your end of year record. Of course, there are some limitations to non-taxable perks which are defined below.

    • Must cost you £50 or less per employee
    • Cannot be cash – this includes a cash voucher
    • Is not given as a reward or incentive
    • Is not mentioned in an employees contract as a perk, i.e. its not a benefit-in-kind
    • Directors of close companies do not exceed £300 per year

    Tax Benefits Of Turkey Gift Certificates

    Cash gifts, retailer gift cards, and some gift certificates used as employee gifts must be reported by your employee as taxable income. In contrast, our gift certificates are exempt from this requirement under the IRS de minimis fringe benefit rule, are not considered taxable income, do not need to be processed through payroll, and may be deducted as a non-wage business expense by the employer.

    To qualify for the de minimis exclusion the following criteria must be met:

    • The gift must be of nominal value. There is no set dollar limit, but the IRS has ruled in one particular case that a gift over $100 must be treated as taxable income.
    • The gift must be infrequently given. Holiday employee gifts are specifically mentioned, as are turkeys, hams, and gift certificates for a specific item .
    • The gift may not be cash or a cash equivalent under the de minimis rules.
    • Accounting for the employee gifts must be administratively impractical or unreasonable.

    The last three of these points distinguish our turkey and ham gift certificates from retailer gift cards and many other gift certificates:

    IRS publications referenced in this article:

    Disclaimer: We offer the above only as our opinion, not as expert legal or accounting advice. Please consult your attorney and accounting professionals for counsel relative to applying the IRS de minimis rule to the specific circumstances of your employee gifts.

    For other articles related to employees, gifts go to our Best Practices section.

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    Are Gift Cards Taxable Income To Employees

    Is it ever possible that a retailer gift card given to employees can use the de minimis exception to taxable income to the employee? What if the gift cards are given at a retailer such as Apple where specific products are the only possible end gifts?

    Editor’s Discussion Summary:
    • Gifts under $50 vs any gift opinions
    • Some employers add the cost of the tax to deliver the net gift
    • De minimis meals & employee appreciation awards
    • IRS documents seem to indicate virtually always taxable with few exceptions
    • Plus much more below including this discussion on accounting

    What Is Not Considered De Minimis

    Purchasing Me2You gift cards through Thesaurus Payroll Manager

    The IRS uses the term occasional for benefits that are rarely provided. Benefits provided routinely are probably not de minimis. For example, a one-time ticket to a sporting event may be de minimis, but season tickets are not.

    The IRS does not identify a particular dollar amount that qualifies as a de minimis fringe benefit. However, the IRS has ruled that items worth more than one hundred dollars could not be considered de minimis under any circumstances.

    Employer-provided cash or cash equivalent items are taxable. Per the IRS, a gift card is considered a cash equivalent unless it allows an employee to receive a specific item of personal property that is minimal in value, provided infrequently, and is administratively impractical to account for.

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    Taxability Of Gift Certificates

    The IRS has recently issued an opinion that gift certificates, gift cards, gift coupons which have a face value on them are considered cash equivalents and therefore are subject to employment taxes without regard to their value. This includes gift certificates which cannot be converted to cash. It also includes theater tickets and tickets to sporting events. Gift certificates or gift cards to the Bookie, Home Depot, Nordstrom, etc., which are given to employees for any reason and for any amount are taxable to the employee.

    Payroll Services will tax employees using the earnings type Fair Market Value or FMS for students. Accounts Payable will provide payment information to Payroll Services. Departments should identify recipients name, WSU Id number, account coding and amount received on invoices, department order comments, or purchasing card notes when processing orders.

    Background

    Employer-provided holiday gift coupons redeemable at local grocery stores are not excludable from gross income and wages as a de minimis fringe benefit, according to a recently published technical advice memorandum from the Internal Revenue Service.

    The gift coupons had a face value of $35, the approximate value to the annual holiday gifts provided in the past.

    The gift coupon had the employers name and address printed on the front. The face value and the words gift coupon were prominently displayed. The coupon listed food stores where the coupon was redeemable and had certain restrictions.

    Watch For Gifts Forming A Series

    While the general rule is that there is no limit on the number of individual trivial gifts that can be given to an employee in any one year – provided each gift individually qualifies for relief there are rules which prevent an employer trying to divide a larger gift into several smaller ones.

    HMRCs latest Employer Bulletin highlights how while providing a gift card of £10 would initially fall within the trivial benefit rules, topping up the same card with £10 more than four more times in the tax year will take the total of the benefit over the £50 limit. In that case, the whole series of gifts will be considered a single benefit which then fails to meet the trivial benefit conditions so both the original gift and the top-ups will be taxable.

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