Hey Compliance Warriors!
Frequently, I get questions about the tax laws surrounding the practice of providing gift cards, cash, or other cash equivalent means of rewarding or compensating employees. Many people are surprised to learn that these payments (or gifts) are actually taxable as wages.
Here are the IRS sources for your review:
Cash is generally intended as a wage, and usually provides no administrative burden to account for. Cash therefore cannot be a de minimis fringe benefit. An exception is provided for occasional meal or transportation money to enable an employee to work overtime. The benefit must be provided so that employee can work an unusual, extended schedule. The benefit is not excludable for any regular scheduled hours, even if they include overtime. The employee must actually work the overtime. Meal money calculated on the basis of number of hours worked is not de minimis and is taxable wages.
Cash or cash equivalent items provided by the employer are never excludable from income. An exception applies for occasional meal money or transportation fare to allow an employee to work beyond normal hours. Gift certificates that are redeemable for general merchandise or have a cash equivalent value are not de minimis benefits and are taxable.
EXCEPTION: A certificate that allows an employee to receive a specific item of personal property that is minimal in value, provided infrequently, and is administratively impractical to account for, may be excludable as a de minimis benefit, depending on facts and circumstances.
The exception noted above does not usually work for incentive programs and must truly be of minimal value. There is no actual number that the IRS provides to define “minimal”. But, a $25 rule is good to follow and the item received through the certificate must be “personal property”. Again, the certificate must be an infrequent provision and you must show that accounting for the certificate item would be more time-consuming than it is worth. This is a highly arguable exception. So, I do not recommend an employer use it for an incentive program.
Read this IRS advice also: https://www.irs.gov/pub/irs-tege/p_4090_fed_0305_text.pdf
Page 2 says:
So, if an employer provides a turkey, a ham, or other property of nominal value to employees, the value of these items is not considered wages or salary and is excludable from income. But if an employer provides gift cards, certificates, or coupons to purchase a turkey, ham, or other nominal value property, these are considered wages and are subject to income and employment taxes (even when the card restricts the items purchased, the time to use the coupon, and any unused portion is forfeited) because cash equivalents do not meet the de minimis fringe benefit requirements.