Can I Fully Deduct the Cost of Gifts to Employees?

Say you want to promote employee goodwill. So, you and your partners give out turkeys and hams over the holiday season. You also decide to give the employees $100 each. Can your partnership deduct the cost of the items given, even though the merchandise isn't wages or salaries? Also, are the gifts subject to withholding?

IRS Rules for Employee Gifts

You can deduct the cost of turkeys, hams, or other tangible gifts you give to employees as long as the value doesn't exceed $25 per year per employee. They qualify as business expenses, and the gifts aren't taxable to the employees or subject to withholding. Amounts above $25 are nondeductible as business expenses.

IRS Rules for Cash Gifts to Employees

However, cash or cash equivalents, such as gift certificates, are looked at differently through the tax authorities' eyes. You must treat such gifts as additional taxable compensation, no matter what the amount. These gifts are subject to withholding.

Get More Information About Deductions

For more information on tax issues and deductions for small businesses, get Deduct It! Lower Your Small Business Taxes, by Stephen Fishman (Nolo).

If you need more help, talk to a tax professional, such as a certified public accountant or a tax attorney.