Every year, the holidays pose a conundrum for business owners. Many would like to show their appreciation for clients, vendors and employees, but they do not want to cause any unwanted tax headaches for themselves or anyone else with whom they do business. The IRS has developed a series of rules that addresses that, and explicitly spells out what gifts to employees are taxed.
Business Gifting - General Rule
If you own a business, you can generally deduct a maximum of $25 per person for any gifts you give to employees, vendors, clients, customers or prospects for business purposes. If you have incidental costs such as engraving fees, that does not count against the $25 limit.
Gifts to Employees
Gifts to employees over and above the de minimis amount of $25 are generally taxable income to the employee, just as a Christmas bonus would be. This is true even if the gift comes in a format other than cash. Non-cash compensation is also taxed. However, the IRS does not normally consider a Christmas or holiday meal in the office to be a taxable benefit to the employee.
Gifts to Family Members
If an employer gives a gift to an employee's family member, that is still generally considered a gift to the employee, and the IRS considers that the employee benefited directly from the gift. However, there is an exception for infrequent items such as a gift given in sympathy for the death of a loved one, provided the gift is not extravagant or excessive. A boquet of flowers to a grieving widow, for example, would not be considered a taxable item.
Exceptions
You can give a gift of a promotional item or premium valued at $4 or less without it counting toward the $25 annual limit, provided the gift has your business, company or trade name on the item and it is substantially identical to others you provide for the same purpose.
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