Showing Your Appreciation
Are you hoping to make a big impression on those who have supported you this year? How are you going to do that? Maybe you want to have a holiday reception and wow them with great food. Perhaps you would rather give your significant customers and suppliers a gift of some sort. Whatever your plan, this article is designed to provide you a few pointers on gift-giving, IRS style.
As a general rule, it’s hard to give a gift to an employee and not treat it as W-2 compensation. However, if you give employees something of nominal value (like a ham, turkey or other relatively small gift), you can avoid treating it as taxable income to the recipient. There are two key requirements you must follow to keep your gifts deductible to you without making them taxable to your employees.
The first requirement is that the value of the item must be fairly small. For most employers this shouldn’t be difficult, since gifts often come in the form of food, gift baskets or similar low-cost items.
The second requirement is that the gift cannot be made in cash. Unless you are reimbursing business expenses, cash payments to employees are most often viewed as wages and subject to payroll tax rules. Unfortunately, some employers don’t realize this and traditionally give Christmas "bonuses" to their employees without withholding Social Security and Medicare taxes. If they are audited, and the IRS finds the payments, these employers will be liable for unpaid taxes and the stiff penalties associated with failure to pay payroll taxes.
Don’t make the mistake of giving gift certificates to your employees, thinking they won’t be counted as compensation. Anything that is given to an employee and is readily convertible into cash is taxable to the employee as wages.
Vendors and Customers
Gifts to vendors and customers are a little easier to handle from a tax point of view. Typically, the gifts are not in cash, so you don’t have to worry about 1099 reporting. The tax code also allows you to deduct a wide range of items as business gifts - as long as their value does not exceed $25 per-year per-person.
It’s this $25 limit that can get pretty sticky. While you can find gifts for business partners and customers at less than $25, if you want to give a really nice gift, that can be costly. Notice also that this is an annual limit, which you can easily exceed if you give gifts throughout the year. This means you need to be careful about choosing the gifts you give to business associates.
The gifting limits apply only on an individual basis. There are many other ways you can show your appreciation to customers and other business associates without running afoul of the tax code.
For example, cards expressing season’s greetings are a very good way of letting your business contacts know they are important to you. If possible, a short note to the recipient is an effective way to personalize your message of appreciation.
This is the time of year when holiday receptions and open houses are also the norm. While it is true that one can get overloaded on parties, it is always nice to receive an invitation to a function hosted by someone you know and respect. Even if a customer can’t attend the gathering, just the fact that he or she was invited conveys an important message. While such parties can be pricey, when you look at the goodwill generated on a per person basis, the cost doesn’t seem quite as high.
Even though your employees might be required to attend a holiday reception, they also benefit from building relationships with people who are important to your business. That, along with just being able to attend a nice party, is an added bonus to many employees.
If you intend to serve alcohol at a holiday reception or an employee office party, be very careful. Too often, a host is blamed for an accident caused by an inebriated guest leaving the party. This can lead to costly litigation. It’s best to use professional bartenders when serving alcohol. Professionals are trained to spot someone who has had too much to drink. They are also less likely to worry that cutting off an important client will negatively affect your business. Professional bartenders usually carry insurance for those times when accidents occur - be sure to check on that coverage when you hire them.
This is a wonderful time of year when the majority of people take to heart the notion that it is better to give than receive. Unfortunately, the tax code doesn’t offer you much latitude when it comes to showing your appreciation to important business contacts. When you want to let customers, vendors, employees and other business associates know how important they are, and you feel hampered by the $25 limit on gifts, show your appreciation in other ways. This will help you comply with tax laws while still taking care of your supporters. Should you have any questions on your options, give us a call. We are always here to help our important business contacts - and that includes you!
Have a happy and safe holiday season!