Income Tax On Employee Gifts, Even Santa Gets Taxed

Most of the gifts someone receives from an employer are counted as compensation. This causes employers to track the values of gifts to employees for accurate reporting to the IRS. Cash gifts are counted along with the fair market value of any property given. A tax professional with EA certification is qualified to assist businesses with this tax reporting.
In addition, amounts added to taxable wages are subject to employment taxes. Keeping up with the correct reporting and payment of taxes is a routine purpose of tax CPE. Employee gifts normally cause an employer to owe more tax. This increases the effective cost for every gift.
However, employers can usually eliminate this record keeping burden when they demonstrate that a gift is totally unrelated to business. For example, a wedding gift to an employee is exempt from reporting as taxable wages.
Another exception to the employee gift rules relates to giving during the Christmas season. An employee is not considered a recipient of taxable compensation when receiving property during Christmas that has a nominal value, such as a turkey or ham. However, this exception does not apply when cash is given-even in a small amount. Enrolled agent CPE provides insight about these various rules in order to provide advice to businesses.
There are also a few exceptions that cause prizes and awards to avoid treatment as taxable wages. Firstly, employee achievement awards of tangible property are not taxable compensation when awarded because of length of service, productivity, or safety achievement. Companies benefit when setting up these plans by seeking help of professionals who have completed EA CPE requirements. To qualify for this exemption, the awards must be presented under a written plan that doesn’t discriminate in favor of highly compensated employees and the average annual award does not exceed $400. Awards for other purposes are also exempted when they don’t exceed $400 to any one employee. However, awards are not exempted from reporting as taxable federal wages when they exceed $1,600 to one individual for any single year.
Awards of property other than cash are occasionally given to commission sales representatives. In such cases, there is no requirement for federal income tax withholding. However, such awards are still subject to employment taxes, including the employee portion of Social Security and Medicare. These awards are usually also taxable as state wages.
Employees must still report all awards as income on their federal income tax returns. Elimination of the reporting burden for employers does not change the status of prizes and awards as an employee’s miscellaneous taxable income. A purpose of enrolled agent ethics is assuring that taxpayers correctly report income.

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