Holiday Gifts - IRS Rule by Ruth King Last year the IRS came out with their new rules with respect to holiday gifts. The change was so radical and different from previous rulings that I thought that I would remind you about what is a legitimate business gift for employees. This ruling changed because of a challenge to the law. Unfortunately the business owner lost in tax court. The employer in the ruling had traditionally given holiday hams or turkeys to its employees. However, to allow employees more choice and to simplify the distribution of the gifts, the employer switched to distributing gift certificates redeemable at local grocery stores. The $35 gift certificates roughly equaled the value of the hams and turkeys the employer had previously given. The employer had never withheld income or payroll taxes on the value of the hams and turkeys. Thus, it's not too surprising that it didn't withhold such taxes on the value of the gift certificates either. Unfortunately, when the IRS audited the employer's payroll records, it pointed out that the tax rules don't treat an employer's de minimis gifts of property the same way as gifts of cash or gift certificates. Infrequently, small gifts of property from an employer to its employees (for example, for the holiday season, an illness, or a birthday) are typically not taxable because the tax rules consider it administratively impractical to account for such minor gifts.  However, these same rules almost always treat gifts of cash or gift certificates (no matter how small the value) as taxable wages. Thus, the employer in the ruling was required to include the value of the $35 gift certificates in its employees' wages (making them fully subject to income and payroll taxes). How could the employer have avoided this unfavorable result? The obvious answer is that it could have stuck with giving some kind of property other than cash or gift certificates. It also could have given the employees a holiday party and fully deducted the costs (with no income to the employees) as long as all of the employees or at least a sub-group that didn't favor the highly paid employees were invited. This means that you can go to Barnes and Noble and purchase a book for your employees but you can't give them a gift certificate to Barnes and Noble. Employers may also give employees tax-free gifts up to certain limits if the gifts are tied to an employee's length of service or safety record. However, other than these fairly narrow exceptions, gifts from an employer to an employee are typically treated as taxable wages. That may not seem fair because some employees truly do want to make a gift to their employees, but that's the way the tax rules are written (essentially to avoid potentially abusive situations where an employer might try to turn taxable wages into nontaxable gifts). Forewarned is forearmed! To contact Ruth King call 800-511-6844 or send an email to ruthking@hvacchannel.tv This article is reprinted from the November 14, 2005, issue of Contractor Cents. "Copyright 2005, Ruth King. All rights reserved. Contact Ruth King at ruthking@hvacchannel.tv or 800-511-6844."