Gift cards can help improve your team’s spirits and make them feel appreciated when you use them. Your employees will love gift cards because they can pick out what they want instead of something they might not need. Just keep in mind that you’ll need to know how taxes work with gift cards, and the IRS says all gift cards count as taxable income no matter how much they’re worth.
When you set up your gift card program, it can actually change how your workplace feels. You should write down clear guidelines for how the program works, find a secure place to store the cards and records of who gets what, and handle the tax part correctly. Think about other details, too.
It helps to know the rules when you create a program that makes your employees happy while keeping your business out of problems. When you become familiar with the legal side of things, you won’t make expensive mistakes. Your recognition program will continue to succeed.
Let’s get into it together!
The Nature Of Employee Gift Cards
You’ll need to add gift card values to your staff members’ W-2 forms since the IRS counts them as taxable income. This might feel a bit strange because business owners usually think of them as easy thank-you gifts. However, the IRS views gift cards the same as cash, no matter how much they’re worth.
Every gift card that you give to your employees needs to be reported on their W-2 forms with the full value shown. This applies to all kinds of gift cards, whether they’re for a store or can be used anywhere. You can’t get around this rule when you give out small gift cards, either. Even if you just hand out a $25 card for coffee, the IRS still considers that taxable income.
Your business has to take money out of your employees’ paychecks to cover taxes on these gift cards. This includes federal income tax, Social Security tax, and Medicare tax on the gift card amounts. Some businesses forget to account for this and then run into problems when tax season comes around, so make sure that these withholdings show up in your regular payroll just like you do with normal wages.
Some businesses try to call gift cards “de minimis” fringe benefits to skip the taxes. But this doesn’t work because the IRS sees gift cards as cash. Only small non-cash gifts like a turkey at Christmas or a simple meal might not be taxed as “de minimis” benefits, and gift cards almost never fit into this category based on what the IRS says.
Looking to learn more about an incentive, rebate
or reward program for your business?
DemoCurious about costs?
Try our instant pricing calculator:
You should keep good records when you give out gift cards to your team. Write down who got the cards, how much they were worth, and when you gave them out. These records can help protect your company if you get audited, and they also make it easier for your payroll team to put the extra income on employee tax forms correctly.
Some employers choose to “gross up” their gift card amounts to help with the taxes. That means giving extra money to cover the taxes your employees will have to pay on the gift card. You don’t have to do this. But it prevents your team from feeling like they’re being penalized with taxes for what should be a thoughtful gift.
Written Policies And Eligibility
When you’re putting together a gift card program for your employees, you might want to have some clear rules in place. You should write down who can get these gift cards and what they need to do to earn them. Workers are usually happier when they know what they can expect. One factory in Ohio saw complaints drop by about 30% after it posted its reward guidelines for everyone to see, and the employees felt better about the whole system because they could see that the same rules applied to everyone.
Your written policy needs to cover the basic things about your gift card program. You should say who gets to choose when gift cards are given out and who’ll actually hand them out to employees. Make sure your policy also explains what kinds of exceptional work deserve rewards and how many times someone can get rewarded in a year.
Business owners sometimes don’t know that the IRS looks at gift cards as taxable income, and some people think small gift cards don’t matter. However, the IRS treats gift cards like cash, no matter how much money is on them. You’ll have to add gift card values to your employee W-2 forms, which means you need to track which employees got cards and how much each card was worth. Some payroll systems let you track this information without too much extra work.
Regular gifts could be easier on your budget. If you give non-cash gifts worth less than $75 every now and then, they might not be taxable. Awards for things like safety records or years of service might also get treated differently for tax purposes.
Your policy should also tell you about problems that might come up. You need to choose what happens if someone loses their gift card. Set some restrictions on whether the cards can expire or if unused money stays on the card. Consider whether employees can swap cards if they receive one they don’t want to use.
Support from a tax professional is money well spent. A great accountant helps you set up a program that stays on the right side of the rules.
Storing Procedures
When buying gift cards for your program, you should work with trusted retailers. Many retailers now offer gift cards that include ways to help track your purchases. You shouldn’t buy too many cards all at once. It’s better to get smaller amounts as you need them so you don’t risk losing a ton at one time.
How you store your gift cards matters just as much as how you buy them. You need to treat gift cards like cash because that’s pretty much what they’re. Make sure that you store them somewhere safe like a locked drawer or a safe. Only let people who need to manage them for their job have access to them.
Some businesses have run into problems when too many of their workers could get to their gift cards. One manufacturing company lost thousands of dollars before they realized that gift cards were going missing. They fixed the problem by only letting two trusted managers handle the cards and those managers had to sign them in and out.
You should check your gift cards regularly to catch any issues before they turn into bigger problems. Count your cards at least once a month and make sure the numbers match what’s in your records. Some places even do surprise counts to check that everything adds up and it saves you from much bigger problems down the road.
Technology can make looking after your gift cards a whole lot easier. Online systems that track everything let you see who has which cards and when they’re being used. A few businesses have switched to completely online gift cards now, which means you don’t have to worry about storing physical cards, and you get a record of all transactions without paying anything extra.
People sometimes forget about training their staff on how to manage gift cards. But that matters. Anyone who deals with gift cards should know the rules and why they matter, so you should write down clear guidelines that explain how people should buy, store, and give out the cards. When your employees know you’re keeping a close eye on the gift cards, they’re less likely to use them in the wrong way. One healthcare company found that just using an easy spreadsheet to track their cards resulted in fewer cards going missing without explanation. They didn’t need any fancy or expensive software to see things get better with their program!
Recordkeeping Necessities
Keeping your gift card records straight is a big part of handling compensation. The IRS treats gift cards as part of your employees’ taxable income, which means you need to track who received what, when they got it, and how much each card was worth. Without good records, tax season might turn into a real pain for you.
When you give gift cards to your team members, make sure that you write down the details. Include each person’s name and the value of their gift card. It’s also important to record the date and the reason you gave them the gift card. You’ll need this information later when you add these amounts to your employees’ W-2 forms.
You’ll need to show these gift cards as extra pay in your accounting system, which is handled differently than most other business costs. You also need to get the payroll taxes right. Some businesses choose to gross up the gift amount to help employees cover the taxes they owe.
Make sure that you hang onto your records for at least three years. That’s how far back the IRS can look during an audit. Your gift card program might not seem like a big deal. But having those records could save you from some serious problems down the road.
Software helps you track your gift card program. HR systems recently include built-in features that make this easier. These tools help you keep everything in order and can create reports when tax time comes around.
For any gift cards worth more than $100, you should get the employee to sign a receipt, which can give you a clear paper trail showing that the gift card went to the right person. It also helps remind your employees that they received something from you. Keep your gift cards in a safe place before you hand them out, and treat them just like cash because that’s basically what they’re. Make sure that you keep a log of how many cards you have and how you’ve given them away to help avoid cards going missing.
Methods And Gross-Up
Tax withholding for your gift card program needs some careful planning. The IRS counts all gift cards as taxable income, even the small ones. You’ll need to list these gifts on your employees’ W-2 forms as extra wages, and you’ll also need to take taxes out of their regular paychecks to cover this extra money.
You can pick between two main ways to manage the tax part. The percentage strategy is usually easier: you just take out 22% for federal taxes. The aggregate strategy adds the gift card amount to regular pay and figures out taxes based on the tax bracket your employee falls into. With either method, you still need to take out money for Social Security, Medicare, and any state taxes that might apply.
Businesses use what’s called a “gross-up” for their gift cards. Let’s say you want to give someone a $100 gift card: you might actually give them $130, so they end up with the full $100 after taxes are taken out. Your payroll system can usually calculate how much extra you need to add based on the different tax rates.
Your employees will probably like it when you gross up their gift cards because they get the full amount you want to give them. Nobody’s happy when they get a $100 gift card but then see that their next paycheck is $30 smaller because of taxes! I know a finance team that started the gross-up strategy for holiday gift cards last year and they received way more positive feedback compared to when employees were surprised by the smaller paychecks.
When you work out the gross-up amount, it isn’t too hard. But you do need to make room for some math. You add up the tax rates that apply to the employee, turn that into a decimal, and then figure out how much extra to include.
Level Up Your Incentives and Rewards
But if you take the right steps, it can become a wonderful way to make your team feel appreciated and valued while also staying in line with tax rules. Even the little things matter. A well-planned program can change how people feel about working at your company. Businesses find that when they take the time to create thoughtful and personal rewards while handling taxes, their employees feel appreciated and valued.
Finding the right balance between following the rules and giving real rewards is worth the extra effort. Businesses that combine careful planning with personal touches usually end up with happier teams and better places to work. Think about your own work life – when did you feel most appreciated and valued by a boss? Was it when you received a standard bonus or when someone picked out something that felt just for you? When you create clear written rules while still making rewards feel personal, you show your team that you care about following the rules and meeting their needs.
You don’t need to risk confusion or possible penalties when you can build a program that works for everyone. When you take the time to plan things out now, it means fewer problems down the road. You could do something tomorrow to better show your team how much you appreciate and value them.
At Level 6, we help make your business better through different types of reward programs. We can help improve how well your sales team performs, make your employees happier, and much more. We have branded debit cards, employee rewards programs, and sales incentive programs that we shape to fit your business needs. We work hard to create programs that make a real difference and get real results.
Get in touch with us for a free demo to see how we can help businesses like yours get better sales results and more value for your money!
Claudine is the Chief Relationship Officer at Level 6. She holds a master’s degree in industrial/organizational psychology. Her experience includes working as a certified conflict mediator for the United States Postal Service, a human performance analyst for Accenture, an Academic Dean, and a College Director. She is currently an adjunct Professor of Psychology at Southern New Hampshire University. With over 20 years of experience, she joined Level 6 to guide clients seeking effective ways to change behavior and, ultimately, their bottom line.
