Tuesday, May 4, 2010

Is it Still a “Gift” Card If the Employee Has to Pay Taxes on It?

I will be using Tuesdays to discuss fringe benefits. It could be taxation or reporting or offering. This week let’s discuss gift cards and their taxation. It amazes me how confusing this topic can be to a lot of people, especially employees. Let’s say you give a gift card for a local store (Target, K-Mart, Wal-Mart etc) to an employee as employee of the week. It’s for $25. The employee expects to get the full $25 of course. They take the card, shop at the store and buy something nice for themselves or a family member spending the full $25. Then on their next payroll check he or she sees that you added the $25 to their gross, took out extra taxes and then deducted it from the net. In other words, treated the gift card as imputed income as required by IRS regulations. Now the employee is on a rampage because it wasn’t “money” they received it was a gift card and they spent the whole amount rather than allow for taxes.

That is where the disconnect seems to be. Employees and even some payroll professionals and employers do not consider anything other than actual money paid through the payroll as taxable wages. Unfortunately the IRS has a different view. Anything received by the employee for services rendered is considered wages unless the IRS specifically exempts the item. Example of an exemption would be a 401(k) deduction from income tax. The pay can be in any form and can include personal property. The IRS regulations spell out that gift certificates are considered the same as cash and are taxable wages when given to an employee for services rendered. Gift cards are merely an extension of a gift certificate. They were not included in the original law because they did not exist at the time. But they are the same thing in the eyes of the IRS.

So what recourse does Payroll have when it comes to taxing gift cards given to employees? Actually none if they want to be incompliance with IRS regulations. To make it easier on themselves payroll professionals need to make sure that everyone, from the employees receiving gift cards to the supervisors and managers issuing them that they are taxable and exactly how they will be treated in payroll.

But as we all have experienced, sometimes payroll can be overruled on taxation issues. If you are overruled and instructed not to withhold on gift cards make sure to document the instructions from superiors in case of future audits.

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