Do Employee Gifts Count as Tax-Deductible Business Expenses?

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The temperatures are cooling off and the smell of pine and mulled wine are in the air, which can only mean one thing: the holidays are almost here! It’s a time when many small business owners look to show their employees some appreciation with gift giving. The question is: Are these gifts tax-deductible?

Are Business Gifts Tax Deductible?

According to the IRS, the answer is yes, your gifts to employees are tax-deductible business expenses, up to $25 per recipient per year. For example, you could deduct gifts like a holiday ham or a gift basket. You’ll need to maintain records of your business gifts, so be sure to keep your receipts and note the business purpose.

A small business owner wraps employee gifts, which are tax-deductible business expenses

Jazz It Up and Deduct the Cost

You don’t have to include the following expenses in the $25 limit, as long as they don’t add significant value to the gift:

  • Engraving
  • Packing, including gift wrapping and boxes
  • Shipping, including postage and insurance

All the associated costs above are considered tax-deductible business expenses beyond the $25 limit. However, the gift plus additional costs must always be less than $100 or it will be subject to tax.

Employees Aren’t Taxed for the Gifts

The IRS notes that employees are not taxed for fringe benefits like holiday gifts. However, if you give an employee $25 as a check, cash or a cash equivalent like a gift card or gift certificate, this is considered taxable income.

If you want to give more money, such as a $250 holiday bonus, include it in your employee’s paycheck. Just remember that the IRS will treat this as wages, not a gift, and will tax the holiday bonus accordingly.

Wishing you and your employees a wonderful holiday season!

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