HR Questions>Are Gift Cards Taxable?

Are Gift Cards Taxable?

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Angelica Crane asked 6 months ago
We are giving our employees gift cards to help offset the gas price increases. Do we have to take taxes out of their paychecks for them?
1 Answer
Riia O’Donnell replied 6 months ago
Angelica

The IRS says yes, you’ll have to withhold taxes from employee paychecks if you offer them a gift card for any reason – including your generous offer to help with the rising cost of gas. The IRS has determined since gift cards are cash-equivalent, they have an ascertainable value. When you issue them to employees, you’ll need to include their value on W-2 Forms as ‘supplemental wages’ and withhold taxes, Social Security and Medicare contributions based on the amount given, from their paycheck.

Some companies try to offset the taxes by providing gift cards that are higher in value. If you planned to give a $100 card, making it $125 instead adds 25% more – most employee’s taxable rate.

Example:
Employee earns $15 per hour, 40 hours per week: base wages $600.
25% tax rate ($125) take-home pay is $450.

If the employer offers a $100 gift card, base wages increase to $700 per week
25% tax rate ($175) take-home pay is $425 (plus the $100 gift card).

An additional $25 on the gift card offsets the paycheck cash loss.

There’s a catch– the more you add to wages, the higher the taxes will be per pay period. If you give high value cards out routinely, you may even be pushing staff members into a higher tax bracket for the year.

For most employees, gift cards that help pay for gas are a welcome benefit – even if there are taxes to be paid. Consider asking employees if they’re comfortable with a small decrease in their paycheck in exchange for the card.

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