Finance Forward Blog
Employee Gift Tax Rules: How Small Businesses Should Handle Gifts, Perks, and Write-Offs
Giving gifts to employees is a great way to build morale, especially around the holidays. But when it comes to taxes, good intentions don’t automatically equal deductions.
Many small business owners assume employee gifts are always deductible or non-taxable. In reality, the IRS treats employee gifts very differently depending on what you give, how often you give it, and how it’s recorded in your books.
Here’s what business owners need to know about employee gift tax rules, including what’s taxable, what’s exempt, and how to track these expenses correctly.
Are Employee Gifts Tax-Deductible?
The short answer is yes: most employee gifts are deductible to the business, but that doesn’t mean they’re tax-free for the employee.
The IRS generally treats employee gifts as either:
Taxable compensation, or
De minimis fringe benefits (a limited exception)
Which category your gift falls into determines whether it shows up on a W-2, whether payroll taxes apply, and how it should be categorized in your accounting system.
When Employee Gifts Count as Taxable Income
From the IRS’s perspective, anything that looks like cash is treated like cash.
These are considered taxable wages:
Cash bonuses
Gift cards (regardless of amount)
Prepaid debit cards
Digital payments (Venmo, PayPal, Zelle, etc.)
Even if the amount is small, these gifts are treated as additional compensation.
What that means for your business:
The value must be included in the employee’s taxable wages
Payroll taxes apply
The amount should be reported on the employee’s W-2
The expense should be categorized as wages or payroll, not gifts
This is one of the most common compliance issues we see.
De Minimis Fringe Benefits: The Key Exception
The IRS allows businesses to provide small, infrequent, non-cash perks without treating them as taxable income. These are called de minimis fringe benefits.
Common examples include:
Holiday treats (cookies, chocolates, gift baskets)
Occasional meals for employees
Company-branded merchandise
Modest flowers or thank-you gifts
Breakroom snacks and beverages
To qualify, the gift must be:
Low in value, and
Given occasionally, not regularly
There’s no official dollar limit, but the IRS looks at whether tracking the benefit would be unreasonable or impractical.
What does not qualify:
Cash or gift cards
High-value items
Gifts given frequently or on a predictable schedule
If it’s something you’d reasonably expect to track and tax, it probably isn’t de minimis.
How to Record Employee Gifts in Your Books
This is where bookkeeping decisions matter just as much as tax rules.
Taxable employee gifts:
Should be recorded as wages or payroll expenses
Must align with payroll reporting
De minimis employee gifts:
Can be handled more flexibly
- Many businesses include them in:
- Office expenses
- Employee benefits
- Meals and snacks
Some businesses prefer creating a dedicated “Employee Fringe Benefits” or “De Minimis Benefits” account for clarity. Others group these expenses with similar operational costs. The most important thing is consistency and transparency, not the exact account name.
Why Employee Gifts and Client Gifts Must Be Tracked Separately
This is a critical distinction that often gets overlooked.
Client gifts:
Are deductible only up to $25 per person per year
Require careful tracking
Should always be categorized separately
Employee gifts:
Follow compensation or fringe benefit rules
Are not subject to the $25 limit
Often intersect with payroll reporting
Combining employee and client gifts in the same account can create issues during tax prep and increases the risk of misreporting deductions.
Best Practices for Small Business Owners
If you want to keep employee gifts simple and compliant:
Avoid gift cards if you want to skip payroll complications
Stick to modest, non-cash gifts for de minimis treatment
Track employee and client gifts separately
Use consistent expense categories year over year
When in doubt, ask before filing—not after
Final Thoughts
Employee gifts can absolutely be deductible, but how you give matters just as much as what you give. Understanding the difference between taxable compensation and de minimis fringe benefits helps you avoid payroll issues, keep your books clean, and maximize your deductions without increasing your audit risk. If you’re unsure whether an expense qualifies—or how it should be categorized—that’s usually a sign your business has outgrown DIY bookkeeping!
Need help keeping employee perks, payroll, and expenses organized year-round?
If you’re interested in ongoing support, we offer monthly accounting services designed for growing small businesses. Book a free consultation to see if working together makes sense for you.