Are gifts to employees subject to withholding?

Whether a gift is subject to FICA, FUTA and federal tax withholding depends on the type of gift and its value. A holiday gift will not be considered wages subject to employment taxes if the gift is of nominal value, such as a fruit basket or ham. These kinds of noncash gifts are provided merely as a means of promoting the good will or contentment of employees, not as compensation for services. Therefore, they are not subject to employment taxes and withholding.

Gift certificates of nominal amounts, however, may be considered wages subject to employment taxes. The IRS has ruled that gift certificates or similar items of readily convertible cash value are included in wages. However, a federal district court has held that $15 or $25 Holiday Gift Certificates, which were redeemable in merchandise at stores selling the employer's products, were not wages and thus were not subject to FICA, FUTA or federal income tax withholding. Gift certificates that are redeemable in merchandise are not included in wages.

Other holiday gifts from employers to employees are generally presumed to be compensatory in nature and are treated as wages for FICA, FUTA and federal income tax withholding purposes. The fact that a payment is made voluntarily or that the employer receives no economic benefit from making it is not enough to overcome the presumption that the payment is compensation for services rendered.