Gift Card Taxation – Navigating the world of Gift Card tax
Gift cards have undoubtedly secured a strong spot in the business world as a very popular and convenient gift-giving method. Whether they are offered to employees as rewards for birthdays, holidays, and special occasions or to clients to celebrate long-term relations, gift cards are a staple reward and incentive item. They offer flexibility for the recipients, allowing them to choose exactly what they want. However, like many professionals, you might be lost when it comes to gift card taxation rules. But gift card taxation doesn’t need to be complex and reporting you gift card tax doesn’t need to be a source of stress.
In this article, we’ll explore the key aspects of gift card tax rules to help you navigate this intricate subject.
Understanding the basics of gift card taxation
Gift cards are considered a form of prepaid credit – in other words, they are considered cash equivalent. This means that they are subject to taxation.
Taxation applies to gift cards to prevent employers from compensating their employees solely with “gifts” to avoid paying employment taxes on wages.
Let’s go over the different rules that should be considered.
1. Corporate gift cards and tax deductibility
Businesses often use gift cards as incentives, rewards, or gifts for employees and clients. However, the gift card tax implications for businesses can be intricate:
– Employee Gifts: When businesses give gift cards to employees, the Internal Revenue Service generally considers them as taxable income. This means that the value of the gift card must be included in the employee’s wage. Businesses are required to reflect it on their employees’ W-2 forms.
– De Minimis Fringe Benefits: In some cases, small-value gift cards (typically under $25) may qualify as de minimis fringe benefits and might not be taxable. However, this is subject to strict conditions such as the frequency at which the employee receives benefits and should be verified by a tax professional.
– Client Gifts: For gift cards given to clients, gifts are tax-deductible if they do not exceed a limit of $25 per client per year. Amounts exceeding this limit are no longer deductible and should be recorded as taxable income.
2. International gift card taxation
For businesses operating internationally, gift cards are also subject to taxation. Note that each country has different taxation rules, so understanding the tax system in the country where your employees are located is paramount.
In Europe, gift card taxation is similar to the US. Gift cards are subject to the tax called Value-Added Tax (VAT). Gift cards from employers to employees are considered, like in the US, as taxable income, and should be recorded in the employee’s tax return.
We can differentiate two types of gift cards or vouchers.
- Single-purpose vouchers (SPVs): an SPV is a voucher for which the brand of supply of the product is known at the time of purchase of the voucher. Hence, in this case, VAT is due when the gift card is issued. The applied VAT rate, usually around 20%, varies depending on the product.
- Multi-purpose vouchers (MPVs): a voucher for which the brand of supply and the good to be purchased are not known at the time of purchase. Because the product that will be redeemed is not known in advance, the VAT to be applied cannot be known either. Therefore, the VAT of MPVs is due when the voucher is redeemed, not sold.
Conclusion: why gift cards are still a great reward option
The world of gift card taxation is multifaceted and requires careful consideration by both consumers and businesses. While gift cards offer convenience and flexibility, understanding the tax implications is crucial but doesn’t have to be complex and stressful.
Now, you might wonder what benefit there is to sending gift cards if they are subject to taxation. Why not send cash or physical gifts instead? If you take the Toasty Choice Card for example, there are many benefits to rewarding your clients with gift cards.
Simplicity for you, freedom of choice for them: with the Toasty Choice Card, forget about stress and hesitation when choosing a gift for your employees and clients. You only need to send them an amount and they will choose their own gift.
All digital: rewarding digital gift cards instead of physical items is more trackable and easier to manage. You can manage your campaigns, while sitting comfortably at your desk.
Flexible and global: you can effortlessly reward your teams all over the world with the click of a few of buttons without having to worry about currency conversion and international deliveries.
Personalized and thoughtful: gift cards have that extra personal, festive, and exciting touch to them that cash doesn’t have. While gift cards can feel special and distinct, adding extra cash to your employees’ paychecks might go unnoticed. Toasty offers a variety of festive templates you can choose from, and you can even write a personalized message or add your company’s branding.
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