Taxation And Deductibility Of Christmas Bonuses And Gifts

It is the time of season when the snow is beginning to fall and plans are being designed for the annual vacation parties. With all the overall economy around turning, some employers may be considering satisfying their workers with presents or bonus deals. If you’re in this position, you need to know how the IRS handles the deductibility and taxation of the worker perks.

Bonuses are supplemental wages (compensation paid in addition to the employer’s regular wages) and are therefore taxable compensation; they will show up on your books as income on the income statement and are fully deductible. Keep in mind they must have both worker and company fees applied for just like a regular paycheck. The only path to carefully keep the bonus from the employee’s W-2 and not pay the associated payroll taxes is to make it a profit sharing bonus through your 401(k) profit sharing plan.

The IRS specifies a set “supplemental rate” of 25% for the federal withholding area of the bonus; this is the reason why the real bonus amount ends up being much smaller than the initial amount. 25-tax deduction no matter the worthiness of the gift. Cash and cash comparable fringe benefits (present cards, charge cards, and bank cards) are never excluded from the employee’s income as de minimis benefits, of the amount regardless. These types of gifts must be contained in the employee’s wages as taxable income on their W-2. Deductions for de minimis presents of food or drink are not subject to the 50% limit on deductions for business meals; any occasion party tossed at work would generally be completely deductible as an expense for your business.

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