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Who pays the tax on gift cards given to employees?

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in Small Business Tax,Small Business Tax Deduction Strategies

Q. We plan to give gasoline gift cards to employees as incentives for picking up additional shifts. Are these cards taxable? Can we, the employer, simply pay the employee’s portion of the taxes? —T.M., Pennsylvania

A. Bad news: Such gift cards and gift certificates, even in relatively nominal amounts, should be included in payroll. The IRS issued a ruling in 2004 that said an employer who distributed $35 grocery store gift certificates to employees must include that amount in payroll taxes. (IRS TAM 2004437030)

More bad news: If you pay the employees’ taxes in connection with the gas cards, those payments must also be included in payroll. Also, you must include the value of the gas cards (or other noncash compensation) in nonexempt employees’ regular rate when computing overtime.

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