Gift giving is on the minds of managers and supervisors. Here at Thanks, we’ve talked to many managers who feel that they need to give employees gifts to express appreciation. But, it’s important that employers are clear about what’s acceptable at the workplace.
Creating a company guide to gift-giving as part of your Code of Ethics, or Employee Handbook, helps managers and employees understand how they can navigate gift-giving during the holidays and other important life events.
Don’t forget to check out Employers should take more care around employee gifting to understand the psychology of employer gift-giving.
U.S. Tax Code on Employee Gifting
The IRS, U.S. Tax Code, has very strict guidelines around what’s allowed as an employee gift. In other countries, different rules apply. If your company is located, or you have employees outside the U.S., make sure you seek advice on what’s allowed.
Gift Giving Versus Compensation
The IRS has very narrow leeway for gift giving from employers to employees. In most cases, an item that would be considered a “gift” is actually considered compensation by the IRS.
What it means: By giving your employees a gift, you could cause them to lose take-home money by having to pay taxes on the gift out of their regular pay.
The IRS classifies nearly all gifts as a form of compensation to employees. This rule prevents employers from reclassifying employee income as a gift as a way to avoid paying payroll or income taxes on the income.
‘De Minimis Gifts’ Understanding Allowed Gifts
De minimis gifts are nominal or small gifts allowed by the IRS that are not considered taxable. De minimis gifts are the exception, not the rule and they must follow some pretty strict guidelines to qualify.
Gifts must be under $25 per employee to qualify as a de minimis gift. They must also be given occasionally and not be a regular gift. De minimis gifts are gifts so small that it would be unreasonable or impractical to consider them gifts.
One example of a de minimis gift would be an office end-of-the-year party or a Thanksgiving ham given to everyone. But, be careful because giving a gift card at the party would count as taxable compensation.
In the same spirit of giving, you can give an employee flowers or a fruit basket that just had a baby or accomplished a life event without it being considered taxable. That is unless it costs more than $25.
Examples of De Minimis Gifts
- Holiday parties for employees and their families
- Hams or Turkeys around the holidays
- Occasional entertainment tickets
- Fruit baskets
- Flowers
- Wine
Gifts that Are Considered Compensation
Some gifts, no matter how little they cost, are considered compensation by the IRS. These gifts must be reported as compensation and taxes paid, even if the cost was $5. Cash equivalents, such as gift cards, are considered compensation.
Employers often consider gift cards an ideal gift because employees can choose something they value. This eliminates the employers paying for a coffee mug to a non-coffee drinker or a wine bottle to an alcoholic.
And gift cards have many more advantages, including the ability for employers to gift a quality experience to employees. So you probably don’t want to eliminate gift cards from your employee-giving. It’s simply important that you understand how they are classified under the IRS code.
Non Cash Prizes can also be considered compensation when larger than $25 or frequently occur. In other words, even smaller prizes that are given to employees regularly may be considered compensation by the IRS.
You’ll want to consult your tax advisor, but it’s probably safe to say that if you give out quarterly or monthly small gifts, you couldn’t count on the IRS considering those gifts “de minimis”.
Paying Taxes on Gifts
Not only should you pay payroll taxes on most employee gifts, but there is some “gifting” etiquette that most employers tend to follow when gifting gifts. Generally, you should plan on paying all the taxes required around that gift.
That usually means adding the amount of the taxes to the employee’s paycheck so they don’t have to pay taxes out of their regular pay. You don’t want employees to feel shortchanged or penalized because you chose to gift them a gift. Generally, employers add between 20% and 25% of the value of the gift to the employee’s paycheck. Most Americans are in the 15% or lower tax bracket, but you really don’t know where your employee falls because you don’t know what additional income they may have (including family gifting, inheritance, spousal income, or other business income).
Intangible Gifts
Intangible gifts include perks such as an extra paid day off, the ability to have flexible schedules or a prime parking spot. Intangible gifts are not generally considered compensation by the IRS and won’t affect the employee’s taxes. (One exception might be if your company allows unused PTO to be cashed out, then the extra day of PTO could affect an employee’s taxes)
Gifting in Behalf of an Employee
Around half of all employees think gifts should align with a corporation’s values and be philanthropic gifts. According to a survey of 1092 employees, 56% of employees under 30 yrs old believe that employers should give philanthropic gifts. That number lowers to 46% of employees between the ages of 45 and 60.
If you are looking for ideas on altruistic gifts, check out 9 altruistic ways to recognize employees.
Creating an Employee Gifting Policy
It’s important that you create an employee gifting policy so your employees know both what to expect and how to act regarding gifts. There are several aspects that you should cover in your employee gifting policy.
Spending Limits
It’s a good idea to limit the amount of money that employees can spend on gifts to colleagues. Some employers set the limit at $25, while others set a lower limit of $5 for a small, token, or gag gift at a company party.
Whatever your limit, make sure that it’s small enough that it won’t put pressure on employees or be detrimental to their personal budgets.
Another way to approach gift-giving is to allocate “points” to employees inside the Thanks Platform and allow them to gift the points. This avoids passing the gift cost to employees and allows receiving employees to redeem points for items they want.
Optional Gift-Giving
You should also outline that gift-giving is optional for employees. Never require employees to contribute to the group or individual gifting customs. Never pressure employees to give gits. Your policy should clearly state that gift-giving is not required. And managers should be aware that they never accidentally imply that employees need to contribute to team gifts.
Employees who decide to take up a collection for a team gift should understand that they cannot ask or compel every employee to contribute. All donations should be voluntary.
Giving to Superiors
Your policy should include when it’s okay to give a gift to a superior. Giving gifts to superiors can look like an employee is trying to buy favors and should generally be banned.
If you are wondering what an employee policy that bans employer giving looks like, check out this one from the Department of Energy. It bans all gifts from a lower-paid employee to a higher-paid employee unless the person giving the gift is not a subordinate and the gift is based on a personal relationship.
There are times when it might be appropriate for employees to give a gift to a manager. Generally speaking here are a few examples:
- An employee returns from vacation and brings a small souvenir for the manager
- The manager retires and the team contributes a small amount apiece to buy a retirement gift
- A small amount allowed for holiday gifting (such as $5, $10, or a small handmade item such as a plate of cookies)
- A contribution gift to celebrate a special event: the team individually contributes (on a voluntary basis) to buy a cake that’s shared by all.
When Gift-Giving is Ok
There are times when gift-giving is considered ok. Your company policy should outline those times. Usually, gift-giving is considered ok around traditional gifting holidays such as Thanksgiving, Christmas, Hanukkah, Kwanza, or New Year. It’s also traditional to give gifts around major life events such as graduation, the birth or adoption of a new child, marriage, or retirement. (These lists are comprehensive, merely suggestions).
You’ll want to identify that gifts can be given around traditional gift-giving events and holidays, but then outline the appropriate spending and types of gifts. For example, “an employee can gift up to $10 and allow others to contribute to a group gift when someone has a major life event. They cannot expect or imply that employees must contribute to the collection.”
Avoiding Harassment When Giving Gifts
Your policy should prohibit giving awkward, sexually charged, or harassment-like gifts. Any gift that embarrasses, humiliates, or pokes fun of an employee should not be allowed. Even in jest, a very personal item, such as lingerie, is inappropriate and can be deemed sexual harassment.
Your policy should also outline when managers should give gifts. For example, small gifts or recognition gifts are ok, but an expensive gift given to a sole employee that is not part of a recognition program should be avoided.
Managers should not give holiday gifts to one employee that is significantly more than other employees on the team receive. And, gifts should never be given to imply or encourage a relationship outside of the workplace. (You should also define your nepotism policy in your employee handbook.)
Conclusion
Your employee gift-giving guide doesn’t have to be long or tedious. It can simply state what’s expected and allowed and what’s not. Having a gift-giving guide can help alleviate employees’ pressure around gift-giving and give guidance during celebrations.
About Thanks
Thanks is a leading provider of a recognition-based platform that increases communication, builds teamwork, and makes recognition a part of company culture. Fast, easy and simple Thanks makes it easy to bring data-driven employee recognition to your entire organization. O.C. Tanner purchased the Thanks platform in 2019 to fulfill the recognition needs of smaller businesses.
Thanks customers benefit from the same decades of research in employee motivation and company culture that O.C. Tanner enterprise clients enjoy, but in a product that is geared for fast, easy and simple deployment. Whether you’re starting a recognition program or improving and expanding on what you already have, Thanks has everything you need to engage your people with effective, scalable recognition.