Tax and Compliance 8 min

Employee gifts vs bonuses: definitions, tax consequences, and more

Written by Ana Vieira
Ana Vieira

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Gifts and bonuses are an effective way to celebrate hard work and show appreciation for your team members. 

But while your intentions may be good, it’s also important to be aware of any potential tax consequences — for both you and your employees.

In this article, we’ll explain the difference between gifts and bonuses, discuss the potential tax consequences for both parties, and offer some gift-giving tips.

Employee gifts vs bonuses: what’s the difference?

There’s some overlap between gifts and bonuses, but there are also some key differences.

Gifts

A gift can be a physical gift, such as a TV or a piece of jewelry. It could also be a sum of cash (or a cash-equivalent gift, such as an Amazon voucher).

You might give out gifts to employees on their birthdays, during company anniversaries, or on certain holidays.

Note that gifts are freely given at your discretion. They are not leased and there is no expectation that they should be returned. For example, if you give an employee an iPhone to conduct work calls, this is not a gift (and the employee will likely need to return it if they leave). However, if you give an employee an expensive bottle of wine as a thank you for completing a difficult project, this is a gift.

Bonuses

Conversely, a bonus is (usually) a performance-based cash reward that you give to your employees on top of their regular pay. There are two kinds of bonus:

  • Discretionary bonuses: These are given at your discretion and don’t necessarily have to be tied to job performance (although they often are). For example, you might give all your employees a bonus if your business has had a particularly profitable year, or to celebrate a company milestone.

  • Non-discretionary bonuses: These are extra amounts, usually based on job performance, that your employees are eligible for on a recurring basis (i.e., monthly, quarterly, or annually). These are often written into contracts, especially for target-focused roles such as sales. These are NOT gifts and form part of an employee’s compensation package.

You may notice that there are some potential gray areas. For instance, giving someone money for a holiday, such as Christmas, can be both a discretionary holiday gift and a holiday bonus at the same time.

As a result, it’s important to understand if there are any potential tax liabilities.

Are gifts taxable for employees?

Each country has its own rules regarding the taxability of gifts. In most cases, though, it depends on the gift itself.

Cash and cash equivalents

In many locations, cash and cash equivalents are considered as a form of compensation, meaning they are taxable — regardless of the amount. This can also apply to gift cards, gift certificates, and prepaid cards, which are often considered benefits in kind.

If you have employees in different countries, it’s important to check the rules in each of those countries first.

Non-cash gifts

In most cases, the taxability of non-cash gifts depends on the monetary value of the gift. In the UK, for example, gifts under £50 are generally not taxable. Note that there may be other conditions that must be met too, such as how frequently the gift is given or how long the recipient has worked for the company.

In some countries, this criteria can be vague. In the US, for instance, the Internal Revenue Service (IRS) judges tax liability for non-cash gifts on various “facts and circumstances,” meaning you may need to assess each gift on a case-by-case basis.

Again, it’s important to check the rules in each of your employees’ countries.

What about the federal gift tax?

If you and your employees are in the US, you may be wondering about the federal gift tax. 

However, this tax applies to specific transfers of money or property between individuals — it doesn’t have to relate to a business. For example, a parent buying a car and then transferring it to their child may fall under the federal gift tax rules.

In this context, we are strictly referring to gifts whose costs are incurred by a business while gifting to employees (or clients).

Are gifts tax-deductible for companies?

In most countries, gifts are deemed to be business expenses and can be deducted from your taxes. The amount you can deduct depends on the tax rules of that country.

In the US, for instance, the IRS limits business gift deductions to $25 per gift. So if you have five employees and you give each one a $50 gift basket for a company anniversary ($250 total), your potential deduction is $125 (five multiplied by $25).

Note that, for tax purposes, incidental costs are generally not included in the gift value. For example, if you give an employee an engraved watch, the cost of the engraving would be considered incidental, and the tax liability would be determined based only on the watch itself.

Are parties and company events tax-deductible?

This depends on the tax rules in your country.

In the US, expenses “related to activities generally considered entertainment, amusement, or recreation” are not deductible. However, holiday parties are considered an exception.

Tax filing and documentation for gifts

If the gifts are taxable, these will appear in the employee’s taxable income on their tax return. Gifts under the taxable value do not need to be included in tax reporting. 

Remote can help ensure that you are withholding the right amount of tax from your team members in compliance with the relevant tax laws — wherever in the world they are based.

For employers, tax filing and documentation depends on the tax laws of your country, and the legal structure of your business.

Tips for choosing a gift

Unlike bonuses — which are generally performance-based — gifts should not be exclusive. Limiting gifts to a select few can make your other team members feel left out and potentially harm your company culture.

If you want to give gifts but don’t have the budget to provide for everyone, you can offer them as prizes. This can be done as part of an internal competition (such as for coming up with the best name for a product feature), or as a raffle at an online or offline company event. In these instances, not everyone will win a gift, but everyone has an equal chance of getting one. 

Where possible, ensure gifts are appropriate, considerate, and in alignment with your company culture, too. 

Can I give gifts to independent contractors?

In most cases, yes — you can give gifts to an independent contractor. However, as with employees, your gift may be taxable to the contractor and tax-deductible for you.

In the US, for example, you might need to include the value of the gift on the 1099 form, and the contractor will need to account for it when filing their taxes.

On the flip side, you may be able to report this on your taxes as a business expense and potentially deduct some or all of it against your income.

Be careful, though. If you are frequently giving gifts to a contractor, this could potentially create a risk of misclassification, which could result in legal issues and penalties. Learn more about avoiding misclassification.

What about taxes for bonuses?

Unlike gifts, bonuses are generally not tax-free. This is because, as mentioned, bonuses are generally considered as compensation, just like any other job-related earnings.

Tips for calculating employee bonuses

The bonus amount is entirely up to you and depends on your company’s budget and the local market rate for such bonuses.

For non-discretionary bonuses, you can offer a flat amount each year or quarter, or a percentage of the employee’s salary, such as 5%. This depends on the nature of the role, the expectations of the employee, and the extent to which the overall level of compensation is bonus-dependent.

Employee gifts vs bonuses: the bottom line

Giving gifts is a common practice at many companies, but it’s important to understand the potential tax consequences. 

In most cases, cash (or a cash equivalent) is generally always taxable, whereas non-cash gifts may be depending on their value. Depending on your country’s tax laws, you may be able to deduct gifts as business expenses.

Bonuses, meanwhile, are considered to be compensation and are, in the majority of cases, taxable.

This isn’t always the case, though, and the rules in different areas can be vague. As a result, it’s highly advisable to speak with a local tax expert beforehand — especially if you have team members in different countries.

Remote can help ensure that you are meeting your employee and contractor tax obligations across the globe, and advise on the potential tax consequences of giving gifts. To learn more about how we can help, explore our platform — or speak to one of our friendly experts today.

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