An employee gift is any item of value that an employer gives to the members of its workforce. The most common occasions for employee gifting are holidays and anniversaries, but you aren't bound to these calendar events. As a decision-maker in your organization, you may feel that an employee has earned something extra because of their performance, or maybe it's just the middle of the week, and you want to motivate your staff with something they would appreciate.
All that may sound straightforward, but there are a lot of factors to consider before you start handing out goodies to your employees. Here, we examine the diverse facets of gifting to employees, including its tax implications and some best practices, so you can enjoy the advantages of practicing generosity with no unwanted outcomes.
Employee gifts and taxes
The most important thing employers should know about gifting to employees is that it comes with tax implications. According to the Internal Revenue Code Section 102(c), gifts to an employee are considered part of their gross income. As such, they must be taxed and reported on the employee's W-2 for the year they received said gifts.
Not all gifts are taxable, though. The IRS recognizes a category called de minimis benefits, which refers to gifts that are so infrequent and low-value that accounting for them wouldn't make sense. The IRS specifies the following items as examples of de minimis benefits:
- Controlled and occasional use of a photocopier
- Personal use of an employer-provided cell phone intended primarily for business purposes
- Occasional refreshments, such as coffee, doughnuts, and other snacks
- Occasional tickets to theater, athletic, or other entertainment events
- Occasional cash for meals or transportation when working overtime
- Group term life insurance for an employee's spouse or other dependent if its face value doesn't exceed $2,000
- Books, flowers, fruit, and other such items given under special circumstances
- Holiday gifts
"According to the Internal Revenue Code Section 102(c), gifts to an employee are considered part of their gross income. As such, they must be taxed and reported on the employee's W-2 for the year they received said gifts."
How to tell whether an employee gift is de minimis
Though there are no hard and fast rules for determining the de minimis status of an employee gift, you can assume tax exemption as long as the gift is infrequent and low-value — less than $100. Also, you can bet that any gift of cash or a cash-equivalent item does not qualify as de minimis unless specified in the list above. That being the case, giving your employees gift cards would obligate them to report the corresponding values on their year-end tax forms.
Employee achievement awards are a special case
The IRS applies special rules to employee achievement awards for safety or an employee's length of service. Unlike other gifts, which must not exceed a certain cash value, employee achievement awards can take the form of higher-value physical gifts that are exempt from taxation as long as they:
- Aren't disguised wages
- Aren't cash or a cash equivalent
- Aren't vacations, meals, lodging, tickets to entertainment events, or securities
- Are awarded as part of a meaningful presentation
- Don't exceed an overall fair-market value of $1,600 per person per year
Still, many rules and caveats apply to these employee achievement awards. For example, a length-of-service award would not qualify for tax exemption if the employee receives it within the first five years of their employment or they received another length-of-service award of high enough value within the most recent five-year span. For other exclusions to tax-exempt employee gifts, refer to the IRS's Fringe Benefit Guide.
Deducting employee gifts for taxes
If you provide your employees with taxable gifts, your company can deduct the cost of those gifts as business expenses. The catch is that you can deduct only up to $25 per person per year. Of note, the IRS doesn't consider incidental costs, such as packaging, insuring, and mailing, as part of the $25 limit.
Three good reasons to give gifts to employees
Giving gifts is a worthwhile practice because of its uplifting effect on recipients. But gifting to employees, in particular, provides another set of benefits that employers would do well to consider:
1. It can improve retention
Gifting to employees is a way to recognize them, and employee recognition is a proven retention strategy. A thoughtful, useful gift may show that you appreciate your staff as both employees and people, which helps engage them in the workplace and motivates loyalty.
2. It may increase productivity
Employee recognition also helps keep your workforce happy, and happy employees tend to be more productive. According to a 2022 study by the University of Warwick's Department of Economics, happiness among workers correlated with a 12% increase in productivity. That may be why even large corporations such as Google are investing more resources in employee support and satisfaction.
3. It can boost your reputation
If gift-giving is an element of an already positive work environment, it can do wonders for bolstering your relationship with your employees. That can help you earn a reputation as an employee-friendly employer, giving you a competitive advantage in attracting and retaining key talent.
What are some good, simple gifts to give employees?
If you need help thinking of good gifts for your employees, consider the list of gift ideas below. Remember, some gifts may not qualify as de minimis.
- Cash bonus
- Gift card — consider local businesses in addition to national chains and online marketplaces
- Tote bag
- Coffee mug
- Tumbler
- Bento box
- High-quality planner or notebook
- Desk fan
- Desk calendar
- Custom flash drive
- Personalized pen
- Ergonomic foot rest
- Gourmet coffee or tea
- Snack box
- Artisanal treats
- Olive oils
- Assorted hand lotions
- Team/department dinner
Tips for giving gifts to employees
Follow these tips so that you and your workforce get the most out of your employee gifts:
Give gifts that your employees actually want
Gifting can improve morale and engagement only if your gifts are desirable. If you have a small workforce, you can personalize the effort by giving everyone a unique gift that reflects their personality or interests. If your staff is large, focus on useful items that people generally enjoy.
Be inclusive
Being inclusive means considering different backgrounds and ensuring no one feels left out. Imagine, for example, giving a gift for a holiday based on a religion that not all of your employees practice. To avoid such awkwardness, check in with human resources and first-line managers to ensure that your gift-giving doesn't conflict with individual characteristics or deeply held beliefs, and try to generalize the gift-giving occasion as much as possible — e.g., an end-of-year gift rather than a Christmas gift.
Avoid certain foods and drinks
Consider this an extension of inclusivity. Some of your employees may be allergic to certain foods or averse to drinks like alcohol. If you intend to give food or drinks as a gift, make sure that no one in your organization has any conflicts with it, or reserve such gifts for specific occasions when you know the recipient would be receptive to it.
Consider cost and frequency
Giving gifts to employees can increase their tax burden if you gift too frequently or your gifts are too valuable. Spare your employees the need to complicate their tax returns by adhering as much as possible to de minimis and tax-exemption guidelines.
Include a message
With every gift, include a card or note that explains the reason for the gift and thanks the employee for their contributions. This not only contextualizes the gift but adds a personal touch.
The fundamental goal of gifting to employees is to help them feel good about themselves and their place in the organization. Keeping them foremost in your mind is the key to realizing any additional benefits of the practice.
More tips about rewarding your employees
An ongoing way to reward your employees is to support them financially and professionally, which is especially important in times of high inflation.
If your organization isn't able to give raises this year, consider the time-tested strategy of providing non-financial incentives.
