Advice on taxation of gift cards
This is a great question, as it touches on several nuanced areas of taxation and compliance. Let’s break it down to provide clarity and ensure compliance with IRS rules.
1. Gift Cards and Taxability
The IRS generally considers gift cards given to employees as taxable income, regardless of the amount, because they are a cash equivalent. This applies even when the gift cards are purchased using credit card points. Gift cards do not qualify as de minimis fringe benefits because they are easily convertible to cash.
Thus, the value of the gift cards must be reported as wages on the employees’ W-2 and is subject to:
- Federal income tax withholding,
- Social Security and Medicare taxes, and
- Unemployment taxes.
2. De Minimis Fringe Benefit Exception
De minimis fringe benefits are small-value benefits that are:
- Infrequent or occasional, and
- Administratively impractical to account for.
Examples include a holiday turkey or occasional tickets to a show, but gift cards, even for small amounts, are explicitly excluded from being classified as de minimis under IRS rules.
3. Ownership of Credit Card Points
The fact that the credit card points might technically belong to the CEO (as the personal guarantor of the card) does not change the tax treatment of the gift cards. If the points are used for organizational purposes and converted into gift cards for employees:
- The value of the gift cards is still considered compensation to the employees.
- The IRS views the value of the gift cards as being provided in connection with employment, making them taxable.
4. Alternative Solutions to Stay IRS-Compliant
Here are some compliant approaches:
Option 1: Include Gift Cards in Wages
- Proceed with giving the gift cards to employees, but report the value ($200–$250 per employee) as wages on their W-2.
- Make sure to withhold applicable taxes. The gift card value will be subject to the same withholding as regular wages.
Option 2: Provide True De Minimis Benefits
- Instead of gift cards, consider giving small, non-cash gifts (e.g., branded merchandise, small holiday gift baskets, etc.). These can qualify as de minimis fringe benefits and would not be taxable.
Option 3: Offer a Non-Cash Bonus
- If you want to avoid the administrative hassle of taxable gift cards, you could provide a non-cash benefit that is not easily convertible to cash and falls within the fringe benefits guidelines.
Option 4: CEO Donates Personally
- If the CEO personally uses their credit card points to buy the gift cards and gives them directly to employees as a personal gift, it could potentially be considered non-taxable. However:
- This would only work if the gift is not tied to employment (e.g., given as a personal gesture rather than as a company-wide benefit).
- The CEO would lose the ability to deduct this as a business expense.
5. Documentation and Recordkeeping
Regardless of the option you choose:
- Maintain clear records of how the credit card points were used.
- Document the reason for the gift cards (e.g., holiday appreciation) to demonstrate intent and compliance with IRS rules.
6. Consult a Tax Professional
Because the specifics of your nonprofit’s situation involve a mix of personal and business finances, it’s a good idea to consult with a CPA or tax attorney to ensure proper reporting and avoid unintended tax liability.
Summary
Gift cards are taxable income for employees, even if purchased with credit card points.
Report the value of the gift cards on employees’ W-2s and withhold applicable taxes.
Consider alternative non-cash gifts to qualify under the de minimis fringe benefit exception.
Document your processes carefully and consult with a tax professional to ensure compliance.
This approach ensures your nonprofit stays compliant while appreciating your employees.