Gift Cards & Tax Hassles
If you buy AB 1825 training from the California Chamber, they say they'll give a $5 Starbucks gift certificate to supervisors who complete their course. This may sound like a good idea, but it raises a variety of potential problems.
Although the most common problem with "gifts" is the potential for raising “conflicts-of-interest,” that isn't the case when the gift is disclosed to the employer and the employer authorizes the gift to reward an employee.
But any gift -- even a $5 gift certificate -- may create problems because it's:
Generally, any monetary or other benefit given to employees for their services is considered "wages." Wages must be recorded, paid timely, and a wage statement (showing applicable deductions) must be provided. Plus, it must be included in non-exempt employees' overtime pay.
For example, the US Labor Department's Opinion Letter (2-14-2001-6) says a $50 finder's fee paid to cashiers for discovering/recovering bad credit cards is included in regular rate and thus raises the overtime premiums owed by the employer. Another Opinion Letter (7-05-2005) says that bonuses paid by an outside vendor (and not employer) are included in the employee's regular rate and thus raises the overtime premiums owed by the employer.
Second, most benefits are considered taxable income. As noted in the IRS Publication 15b: "Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it. Section 2 discusses the exclusions that apply to certain fringe benefits. Any benefit not excluded under the rules discussed in section 2 is taxable."
One exclusion is for small gifts (e.g., a turkey at Thanksgiving or Christmas). However, the IRS says these "de minimis" gifts are excludable only when they don’t have a cash value. For example, an IRS technical advice letter (TAM 200437030) indicates that an employer's gift to employees of (1) a holiday turkey is not taxable, but (2) a $35 grocery coupon is taxable. As the “de minimis” section of Publication 15b says, “Cash and cash equivalent fringe benefits (for example, use of gift card, charge card, or credit card), no matter how little, are never excludable as a de minimis benefit....”
Finally, the gift is also taxable to the employer. This is true because the employee's receipt of any job-related gift is legally the property of the employer, and thus the employer has legal entitlement (constructive possession) of the gift. According to Labor Code 2860: "Everything which an employee acquires by virtue of his employment, except the compensation which is due to him from his employer, belongs to the employer, whether acquired lawfully or unlawfully, or during or after the expiration of the term of his employment." Since the gift "belongs" to the employer, the employer has to account for the cash-equivalent income.
So, while we encourage employers to offer incentives to employees to complete mandatory training courses, it may make more sense to award chocolate, pats-on-the-back and "atta boys!" or PTO rather than a gift certificate with a monetary amount.
Although the most common problem with "gifts" is the potential for raising “conflicts-of-interest,” that isn't the case when the gift is disclosed to the employer and the employer authorizes the gift to reward an employee.
But any gift -- even a $5 gift certificate -- may create problems because it's:
- considered wages for the employee (and thus raises overtime and recordkeeping issues),
- taxable to the employee, and
- taxable to the employer.
Generally, any monetary or other benefit given to employees for their services is considered "wages." Wages must be recorded, paid timely, and a wage statement (showing applicable deductions) must be provided. Plus, it must be included in non-exempt employees' overtime pay.
For example, the US Labor Department's Opinion Letter (2-14-2001-6) says a $50 finder's fee paid to cashiers for discovering/recovering bad credit cards is included in regular rate and thus raises the overtime premiums owed by the employer. Another Opinion Letter (7-05-2005) says that bonuses paid by an outside vendor (and not employer) are included in the employee's regular rate and thus raises the overtime premiums owed by the employer.
Second, most benefits are considered taxable income. As noted in the IRS Publication 15b: "Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it. Section 2 discusses the exclusions that apply to certain fringe benefits. Any benefit not excluded under the rules discussed in section 2 is taxable."
One exclusion is for small gifts (e.g., a turkey at Thanksgiving or Christmas). However, the IRS says these "de minimis" gifts are excludable only when they don’t have a cash value. For example, an IRS technical advice letter (TAM 200437030) indicates that an employer's gift to employees of (1) a holiday turkey is not taxable, but (2) a $35 grocery coupon is taxable. As the “de minimis” section of Publication 15b says, “Cash and cash equivalent fringe benefits (for example, use of gift card, charge card, or credit card), no matter how little, are never excludable as a de minimis benefit....”
Finally, the gift is also taxable to the employer. This is true because the employee's receipt of any job-related gift is legally the property of the employer, and thus the employer has legal entitlement (constructive possession) of the gift. According to Labor Code 2860: "Everything which an employee acquires by virtue of his employment, except the compensation which is due to him from his employer, belongs to the employer, whether acquired lawfully or unlawfully, or during or after the expiration of the term of his employment." Since the gift "belongs" to the employer, the employer has to account for the cash-equivalent income.
So, while we encourage employers to offer incentives to employees to complete mandatory training courses, it may make more sense to award chocolate, pats-on-the-back and "atta boys!" or PTO rather than a gift certificate with a monetary amount.
This entry was posted
on Thursday, February 17, 2011 at 4:11 PM.
