The holidays are almost here again! As business owners, we want to make sure our employees and clients or customers know how much we appreciate them. Finding the perfect gift is a great way to do that. You must also remember that you are a business owner, so every dollar you spend must be tracked and reported to the IRS. Here are some things you need to keep in mind when shopping for gifts this year.
CLIENT/CUSTOMER GIFTS:
Those of us who are in the service industry must always be thinking about how to keep our clients and customers happy. Offering discounted services and special deals can be a way to do that for the masses. What about those really big, loyal clients that you want to show some appreciation to? You may want to get them something special, right? There are some guidelines to follow.
Client gifts can be tax deductible! You are allowed to deduct up to $25 per person per year. If the gift you give cost you $100, only $25 of that is deductible. You can give a client a gift that cost you $1000 if you wish, just be aware of the tax liabilities. If your business is a partnership, the partnership is treated as one tax payer. Each of you may give separate gifts, but only $25 per client will be allowed as a deduction.
Incidental costs such as engraving, packaging, insuring and mailing are not included in your $25 limit.
There are some exceptions to the $25 limit. Gifts that are valued at $4 or less, have the company's logo or name permanently printed on them, or are items the company widely distributes are exceptions.
Any item that might be considered either a gift or entertainment generally will be considered entertainment. So tickets to an event would likely be categorized as entertainment. If you give a client packaged food items or a beverage that they are intended to consume at a later date, this is considered a gift and falls in the $25 limit rule.
EMPLOYEE GIFTS:
Our employees work hard and make us proud every day! When the holidays approach, you want to reward them and thank them for all that they do for you. What is the best way to do that?
Keep in mind that almost any gift you give to an employee is subject to income tax.
There is an exception. De minimis fringe benefits are, by definition, too minimal to be considered. This will allow you to give a gift that is tangible and of low market value and the employee will not need to report it as income. Some examples of de minimis fringe benefits are:
~Traditional holiday gifts (not cash) with low market value
~Special circumstances of giving flowers or other gift in the case of an illness
~Occasional theater or sporting events tickets
~Occasional cocktail parties or group meals
The IRS does not specify a maximum dollar amount for excluding de minimis fringe benefits from an employee’s taxable income, but the business can deduct no more than $25 of a gift to any one person each year, including employees.
Many employers want to give their employees Gift Cards, as these are easy and will be appreciated by most employees. BE AWARE that gift cards are basically the same as cash and will need to be reported as income on the employee's payroll!
Gift cards of $25 or less per employee are deductible to the business.
What about bonuses? Bonus checks are definitely considered income and must be taxed as such. If you want to make sure your employee gets a certain amount, even after taxes, there are a couple of ways to do that.
You can "Gross Up" the bonus check! For example, if you want to give an employee $200 on a bonus check, you need to find out how much to pay them before taxes so that after the taxes have been taken out they still receive the full $200. There is a very handy calculator which can help you with that here: https://www.paycheckcity.com/calculator/grossup/
Another way is to have the employee change their withholding just for that bonus check. The employee will need to fill out a supplemental W-4 just before the bonus is processed, and then fill out another W-4 afterward to return their withholding to match the beginning of the year. This way you can process their bonus for whatever amount you want and the amount of tax withheld will be less for that check.
HOLIDAY PARTIES
Holiday parties are fully deductible and you don't have to include any part of it in your employee's income. In order to be 100% deductible, you can invite employees and their families. If you invite clients or others, you will not be able to fully deduct your party.
You can make sure that your party is fully deductible by including performance awards, presentations talking about past successes and future goals, or an employee morale focus.
Facility rentals (as a necessity), decorations, favors, and food are allowable. Alcohol and entertainment such as DJs are not!
This is a great time for being generous and showing our love and appreciation for the people in our lives. When giving as a business owner, make sure you know the rules so that everyone will have a holiday they enjoy, including you!
