Is There Tax on Gift Cards?
I love these type of questions, because the terms are never quantified. Today, pretty much everything has tax implications, except the air you breath. Of course if you happen to need supplemental oxygen, you likely will pay tax on that.
So let's tighten up the question, define the terms, and answer this question.
What is a Gift Card?
This sounds easy, but to be clear, let's define gift card anyways. A gift card is a prepaid payment card that contains an amount of money that has been pre-loaded onto it. In olden times we called them gift certificates.
The card can be used as a form of payment at designated stores or locations, and the value stored on the card can be used to purchase goods or services. Gift cards typically come with an expiration date and may contain fees associated with them.
Different Types of Gift Cards
There are many different types of gift cards available. The most common type is the prepaid card, which can be used to purchase goods and services in designated stores. Other types include store-specific cards, which can only be used in the store it was purchased from, and reloadable cards, which allow you to add more money onto the card after you have used up the initial amount.
These cards can be virtual of course, and not have a physical card associated with them. They usually have no cash value meaning they cannot be redeemed for cash, although there are ways around that.
Do Gift Cards Have Tax Implications?
Well of course! The two primary taxes to consider when dealing with gift cards are sales tax and income tax.
Federal Income Tax on Gift Cards
For income taxes purposes there are a couple of ways gift card show up. First, as gifts to employees. The second would be when businesses sell and redeem gift cards. Let's start with the employee implications.
Are Gift Cards Considered Income?
Generally, gifts are NOT taxable. When your grandmother gave you $50 for your birthday that was not taxable to you, and didn't require you to file a tax return. There is a Federal Gift Tax (see I told you everything was taxable) that is related to the Federal Estate Tax, but we're just focusing on the income tax here.
When an employer gives a gift card to an employee, however, it is taxable income subject to all employer taxes, including Social Security taxes.. There are a whole list of fringe benefits an employer can provide to employees that allows the business a tax deduction while being income tax free to the employee.
Cash and cash equivalents are specifically excluded from the IRS definition of fringe benefits. Therefore gift cards are taxable to an employee and must be included as wages on their W-2.
How Does the IRS Treat Non-Cash Gifts?
Non cash gifts can fall under the definition of fringe benefits to employees. One fringe benefit is the so called de minimis fringe benefit. Here is the list from the IRS:
Controlled, occasional employee use of photocopier
Occasional snacks, coffee, doughnuts, etc.
Occasional tickets for entertainment events
Holiday gifts
Occasional meal money or transportation expense for working overtime
Group-term life insurance for employee spouse or dependent with face value not more than $2,000
Flowers, fruit, books, etc., provided under special circumstances
Personal use of a cell phone provided by an employer primarily for business purposes
The IRS has not set a value on de minimis gifts since 2001, when they deemed the threshold at $100.
What Are the Rules for Non-Cash Gifts?
In order to be excluded from an employees wages, non-cash gifts need to meet the de minimis definition. When determining whether a benefit qualifies, the IRS will look at two factors, frequency and value. The gifts can not be regular, but occasional.
The value is not set to qualify, as stated earlier, but the last guidance in 2001 was $100.
State Laws Regarding Sales Tax on Gift Cards
Let's look at the other tax question for businesses. When do you collect sales tax for gift cards?
Are All States the Same When It Comes to Sales Tax on Gift Cards?
Although every state has different sales tax laws, no state should tax the sale of the gift card itself. Rather, any applicable sales tax would be collected when the purchase with the gift card is made.
States vary widely on what goods or services or subject to sales tax, so you need to keep updated with your current state and city requirements.
Other Taxes That May Apply to Gift Card Purchases
The underlying good or service may be subject to additional taxes. Paying with a gift card does not change that. Federal excise taxes are a great example. For instance, there is a federal excise tax on gasoline. This tax must be remitted when the purchase with a gift card is made.
Employer Gifting Rules and Regulations
Tis the season for gifting. We've covered these situations above, but if you skipped here, I'll review for you!
Can Business Owners Give Employees Gifts During the Holiday Season?
Yes of course you can. Whether they are taxable to your employees depends. If the gift is in cash, it is taxable. If it is non-cash, it likely will qualify as a de minimis gift, depending on the value.
What Kinds of Employee Gifts are Permitted by Law?
You can give your employees any gift as long as it is legal. So no blow for Christmas.
Conclusion
Here's the recap. Cash gifts, including gift cards to employees are considered wages and should be included as income on their W-2. Non-cash gifts may qualify as de minimis fringe benefits depending on their frequency and value. Sales tax should not be collected on the sale of gift cards. All applicable taxes are due when the purchase is made.
