Are Year-End Gifts and Bonuses Taxable?

GiftAre you planning on giving your employee a year-end bonus or holiday gift?  Are you aware of the rules regarding the taxability of these items?  Make sure you are following the IRS guidelines regarding if tax must be withheld on the bonus or gift.

Bonuses paid for outstanding work are included in income and must be reported on the employee’s W2 form.  This must be run through payroll (either with the regular pay check or processed separately) and the amount is subject to payroll tax withholding.  If the bonus given is goods or services, the employee must be taxed on the fair market value.  To do this properly, the value is added into the paycheck, taxed as appropriate, and then the gift value reversed back out of pay so that the employee’s net pay is the regular gross wage less all taxes withheld.

If you give a gift of nominal value (not including cash or gift certificates), the value of the item does not have to be included in wages.  However, if giving cash or a gift certificate, it must be included in wages no matter the amount.  For instance, if you gift a gift certificate to purchase a turkey or ham, that value is taxable.  However, if you give them an actual turkey or ham, it is not taxable.

The basic rule is if it is cash or something that can be easily converted into cash,  you must include the value of the gift in payroll and that amount is subject to tax.  If the non-cash gift given is a value so small that it would be unreasonable for the employer to account for it, it does not need to be included in income.

If giving taxable bonuses or gifts to your employees, make sure to notify your payroll company so it can properly be included in the paycheck and year end W2 form.