Payroll doesn’t have time to shake off any lingering holiday blues, since it’s down-to-the-wire time for W-2s.
No getting around it: You must tax gift cards
Question: The customer service department recognized outstanding employees by giving them gift cards. Instead of the company purchasing the gift cards, the cards were donated by employees’ managers. Those managers are insisting that the gift cards are tax-free because they were personally donated by them. This doesn’t sound right. Who’s correct?
Answer: You’re right to be concerned. It doesn’t matter how employees obtained their gift cards. The cards are taxable and reportable on employees’ W-2 forms, since they received them in the course of their employment.
You’ll have to gross-up the value of the cards. Grossing-up is a fraction—the numerator is the cards’ face value and the denominator is 0.6935. Don’t forget to factor state taxes into the denominator, as well.
The special accounting rule isn’t so special
Question: An employee received staff discounts that we know are taxable. Due to our internal accounting procedures, the value of the discounts she received during the last two weeks in December won’t be available until the last week in January. This puts us in a W-2 bind. Can we use the special accounting rule and treat the value of those discounts as paid in 2012?
Answer: No. The special accounting rule can only be used for noncash benefits; employee discounts are cash equivalents. The value is taxable income for the 2011 tax year. Once you get the value of the December discounts, you’ll have to pull her W-2 out of the pile and figure the taxes. Your only option is to gross-up the payment. Idea: For next year, suggest a cutoff date of late November for taxable discounts.