Many business owners like to show their appreciation by giving thoughtful gifts to valued clients and employees. It is a wonderful way to build relationships and show your team just how much you appreciate all that they do. Whether it’s a way to say thank you or happy holidays, there are important considerations to be aware of before handing out gifts. In some instances, client gifts are tax-deductible, others will end up being taxable to the employee.
Gifts for employees
When choosing to give your team members gifts, there are a few important things to consider:
- Is the gift taxabl e to the team member?
- Does the gift qualify as a deductible business expense?
The answer to the above questions depends on the value, occasion, and form of gift. If the gift is indeed taxable to an employee, you will need to withhold payroll taxes, pay your portion of payroll taxes, and report the added income to the IRS. If the gift is not taxable to the employee, the gift must be reasonable in order to be deducted as a business expense.
Gifts that are taxable to the employee are as follows:
- Gifts worth more than $75
- Gifts in the form of cash, or gift cards redeemable for cash
- Monetary prizes
- Gifts or awards for achievements
- Non-monetary bonuses such as vacations
In most cases, gifts to employees that meet one of the above qualifications will be considered taxable to the employee. Non-cash gifts to employees valued at less than $75 are not taxable to the employee and can be a business expense deduction. There is a tax-free limit of $1,600 for all awards given to each employee in the year. This $1,600 limit does not include gifts awarded for length of service or safety achievements, so long as they are not cash or gift cards.
There are also occasions when gifts to employees are so minimal that they will not be taxable to the employee and are considered de minimis fringe benefits. These gifts are minimal and may include holiday gifts, fruit baskets, occasional event tickets, flowers, fruit, etc., and can be deducted as non-wage business expenses.
Note that some gifted food items may fall under meals and lodging expenses. We recommend consulting with your CPA in advance to discuss the nuances here. If your gift involves a meal in a restaurant, it may be subject to the rules related to meals and entertainment expenses.
Gifts for clients
Whether it’s a gift to say thank you for being a valuable client, or for a holiday, the good news is that client gifts are tax-deductible, but they have limits. Businesses can deduct $25 in gifts per person per year. These limits also apply to freelancers or contractors with whom you do business.
According to the IRS, there are a few items to consider when allocating your $25 budget:
- Incidental costs (e.g. engraving, packing, or shipping) aren’t included in the $25 limit if they don’t add substantial value to the gift.
- If the gift costs $4.00 or less, has your business name permanently marked on the item, and is distributed on a regular basis, it does not need to be included in the $25 limit.
- If the gift could also be considered as entertainment and a gift, the gift should then be reported as entertainment and is not deductible.
Gifting from different partners to the same client will not get around the $25 limit. All gifts from the business must not exceed $25 in order for the client gifts to be tax-deductible.
How to keep track of gift expenses for tax time
It is important to keep track of all gifts given to clients, contractors, and employees. As mentioned above, different types of gifts and values must be reported differently on your taxes. Failure to accurately track gift expenses could mean missing out on tax-saving business deductions.
A cloud-based accounting app is a valuable tool for tracking gifts. Xero is our preferred cloud-based accounting solution for managing all business expenses. Business owners have real-time insights into their business finances, and they can accurately manage cash flow and accounts from any supported device. Utilizing a cloud-based accounting app aids in keeping your back office organized, meaning you’re well prepared for tax season, never missing out on a business expense deduction.
We have put together a comprehensive guide of the top small business tax deductions. In this guide you will find small business tax tips, detailed examples, and strategies to track expenses, giving you a better understanding of how to take advantage of these tax savings.
Before you start ordering special occasion, thank you, or Christmas gifts, make sure you fully understand just how the gift will impact the business and your employees’ taxes. It would be a shame for your thoughtful gift to end up costing you and your employees an unexpected tax expense. If you’re not sure how to plan your business’s gifting and track gifts, contact us to schedule a consultation. We would be more than happy to discuss your goals, how gifting can fit into your tax strategy this year, as well as time-saving apps to integrate into your business.