The True Tax Consequences Associated with Giving Employees Gift Cards, by David Selig, Selig & Associates

• Gift cards redeemable for cash are taxable to the employee. And contrary to some bad information that’s been floating around the Internet, there is no “holiday gift exemption”.
• Monetary prizes, including achievement awards, as well as non-monetary bonuses like vacation trips awarded for exceeding sales goals, are taxable compensation, and not just for income taxes, but for FICA, so withholding taxes apply. 

• Gifts worth more than $75 are taxable to the employee recipient.  Specifically, non-cash employee gifts of minimal value (under $75 per year), are not taxable.

• Any item that could be considered either a gift or as entertainment is generally considered entertainment and cannot be deducted.
• You need to have records that prove the business purpose of the gift as well as the details of the amount spent.

• The tax-free value is limited to $1,600 for all awards to one employee in per year. Gifts awarded for length of service or safety achievement are not taxable, provided they are not cash, gift certificates or points redeemable for merchandise

But what about my customers?Are business gifts deductible?Answer:  If you give business gifts in the course of your trade or business, you can deduct all or part of the costs subject to the following limitations:

• You deduct no more than $25 of the cost of business gifts you give directly or indirectly to each person during your tax year.
• If you and your spouse both give gifts to the same person, both of you are treated as one taxpayer.
• Incidental costs such as engraving, packing or shipping aren't included in the $25 limit if they don't add substantial value to the gift.
• For purposes of the $25 per person limit, don't consider gifts costing $4.00 or less that have your business name permanently engraved on the item and which you distribute on a regular basis.

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