ARDMORE, Pa. — The season for gift-giving and holiday parties will soon be upon us. Although many drycleaning and laundry business owners and managers clearly know how to celebrate and show their appreciation to both customers and employees, few are aware that Uncle Sam, in the form of our tax laws, is more than happy to pick up part of the cost.
While parties, business gifts and employee awards often qualify as tax-deductible, giving gifts, bonuses or awards to employees, clients or customers can have significant tax implications for both the business operation and the recipients. Bottom line, however, everyone will be excited to know that their annual employee holiday party may be 100% tax-deductible.
GIFT CARDS AND CERTIFICATES
Gift certificates and the newer gift cards are, for the most part, taxable to employees because they can be converted to cash. While there has been no official guidance regarding small-amount gift cards/certificates ($25 or less), they often qualify as de minimis fringe benefits. However, in general, if gift cards or gift certificates are given, taxes must be withheld from the employee’s pay.
GROSSING UP BONUSES
Drycleaning owners and managers considering appropriate employee holiday gifts should keep in mind not only what they’ll enjoy but also how taxes will come into play. Because a “gift” is often considered by the IRS to be compensation, it’s important to note the rules so that employees are not responsible for paying taxes on their gifts.
Employee gifts are usually small enough that the business does not need to worry about employees wanting to change their withholding allowances. For larger bonuses, however, employees should be given the options of changing their Form W-4 withholding deduction amount for that one paycheck.
While some employees will want to change their withholding so as to receive more of the bonus, in many cases, employers will “gross up” a bonus. That is, give the employee more to allow for withholding. For example, if an employee is given a $1,000 bonus, by the time taxes are taken out, the bonus check might be only, say, $750. Giving a higher amount for the bonus can result in a bonus check that shows the full $1,000.
TAX-FREE EMPLOYEE GIFTS
Among the options that will ensure employees won’t face a tax on their holiday gifts are smaller gifts. Whether for customers or employees, gifts under $25 are tax-exempt. If this is the amount typically spent on each employee, then there is nothing to worry about. Taxes are also a non-factor if the holiday gift is a reward for service (i.e. highest sales) or longevity (i.e. the employee has been with the company for 10 years).
If your gift to employees is a charitable contribution in their name, there is no worry about taxes, no matter the amount.
If the business is such that employees would enjoy its products, giving products or services as gifts can mean not having to pay taxes on them. In the case of a drycleaning business, while an employee might not get too excited over office supplies, this might be a good opportunity to get creative.
But be mindful that merchandise given to either customers or employees may be subject to sales tax even though the merchandise is not for resale. It is the rule in many states.
A drycleaning business taking a group of employees, such as the management team, to an event means the cost will usually be tax-free. Remember, the rules say that the group can’t consist only of family members involved with the business if is a tax-free business expense.
TAX-FREE AND TAX-DEDUCTIBLE
As the holiday season fast approaches, every business owner and manager should keep in mind the role that taxes play. Drycleaning business owners considering a “small gift” for employees—fruit baskets, hams, turkeys, wine, flowers and occasional show or sporting event tickets—will find they are generally nontaxable de minimis fringes and tax-deductible by the business.
The cost of occasional parties is nontaxable to employees and their families as a de minimis fringe if they are infrequent and for the purpose of promoting employee health, good will, contentment, or efficiency. Thus, occasional holiday celebrations, cocktail parties and company picnics are fully tax-deductible by the dry cleaner or laundry and are not subject to the 50% limit on business meals. It is, however, always a good idea to consult a tax adviser.
Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult a tax attorney for advice regarding your particular situation.