Gift cards are a popular way for employers to recognize and reward their employees, especially during the holiday season.

But are gift cards taxable income? The short answer: Yes. Gift cards given to employees, regardless of the amount, are considered taxable wages by the IRS and must be reported accordingly. Understanding the tax implications can help businesses avoid compliance issues and potential penalties.

Are Gift Cards Taxable Income?

According to IRS regulations, gift cards are cash-equivalent fringe benefits, meaning they must be reported as taxable wages on Form W-2 and are subject to income tax withholding, as well as Social Security and Medicare taxes.

Unlike certain small gifts that may qualify as de minimis fringe benefits (which are exempt from taxation), gift cards—because they have a clear cash value—do not fall under this exception.

Key Takeaways:

• Gift cards in any amount are considered taxable income and must be reported as wages.
• Employers must include the value of gift cards on Form W-2 and withhold the appropriate taxes.
• Failure to report correctly can result in IRS notices, penalties, and compliance issues.

Check with Your Accounting & Payroll Team

While IRS regulations state that gift cards are taxable, company policies on reporting and taxation may vary. Some businesses may have specific guidelines on how to handle gift cards for employees, whether through payroll adjustments or other methods of compliance.

Before issuing gift cards, it’s always a good idea to consult with your accounting or payroll team to ensure proper tax handling. Staying ahead of tax regulations will help prevent unexpected liabilities at year-end.

De Minimis Fringe Benefits: Where Gift Cards Don’t Qualify

The IRS defines de minimis fringe benefits as benefits so small in value and infrequent in occurrence that tracking them is impractical. Examples include:

✔️ Occasional office snacks, coffee, or meals
✔️ Flowers, fruit, or books given under special circumstances
✔️ Holiday gifts of tangible property with a low fair market value
✔️ Group event tickets given occasionally

However, gift cards and cash-equivalent items are specifically excluded from de minimis status. Even a $10 gift card must be reported as taxable income.

Why Are Gift Cards Considered Taxable?

The IRS treats gift cards as cash compensation, meaning they are taxed the same way as wages. This is because gift cards hold an easily determined value and can be used like cash, unlike a holiday turkey or a company-branded mug.

Employers must withhold federal and state income taxes, Social Security, and Medicare on gift card amounts. For example, a $100 gift card could end up being worth only $72 after taxes, depending on the employee’s tax rate.

Maximize Value for Employees with the Toasty Choice Card

If an employee is going to be taxed on their gift, you want to make sure it’s something they’ll actually use. That’s where the Toasty Choice Card comes in.

Unlike single-brand gift cards that may go unused, the Toasty Choice Card gives recipients the freedom to choose from hundreds of top brands. This ensures that employees get the most value out of their taxable gift rather than being stuck with something they don’t need.

✔ Ultimate Flexibility – Employees can select the brand that works best for them.
✔ Easy Redemption – No complicated processes—just a seamless experience.
✔ No Unused Balances – Avoid waste by letting employees pick what they truly want.

If you’re giving a taxable gift, make sure it’s one that provides real value to your employees.

Toasty Makes Reporting Easy

If your accounting team determines that your gift card benefits must be reported, Toasty provides robust reporting tools to make compliance easy. Our platform tracks issued gift cards, recipient details, and amounts, ensuring accurate record-keeping for tax reporting.

By using Toasty, you can reward employees without the administrative headaches, giving you peace of mind during year-end tax reporting.