Rewards & Incentives: What About Tax?

From employee recognition, to customer loyalty, payment disbursement, and referrals – rewards are a great fit for almost every program. Whether you send rewards to an employee or a customer, you are most likely curious how taxes will affect both you and the reward recipient. Like most items of monetary value, gift cards come with rules and regulations in the form of taxes. Here are some frequently asked questions to help start your search:

Are gift cards taxable?

Yes, generally gift cards are considered a taxable income. This taxable income is subject to federal and state income tax withholding, unemployment tax, and FICA taxes. This includes prizes, bonuses, awards, incentives, and rewards.

Are gift cards considered a de minimis fringe benefit if they are under a certain value?

According to the IRS, gift cards that are redeemable for general merchandise or have a cash equivalent value are not de minimisfringe benefits and are taxable. Typically, gift cards do not fall under this category.

What about gift cards gifted to a customer as a “thank-you”?

Gift cards to customers, vendors, and suppliers have their own set of rules. In general, “thank-you” gifts are deductible by a business up to $25 per person. Gift cards are typically not considered taxable income to the recipient, however, every situation is different.

What factors determine whether a gift card is taxable?

  • Gift Card Amount
  • Gift Card Type – Is it a retail card or a cash equivalent prepaid card?
  • Type of Program – Employee Recognition, Rebates, Customer Loyalty, etc.

Bottom Line:

As you can see, there are many different ways to earn rewards. Whether a reward is taxable or not will depend on the situation at hand. Consult your tax advisor on specifics that apply to your company and program.

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