Free t-shirts, water bottles, or branded hoodies might seem like harmless employee perks. But when it comes to payroll and tax compliance, things aren’t always so simple.
Imagine doing a giveaway for your employees only for them to find out, down the line, that these gifts can be considered taxable benefits. That would likely have the opposite effect to what you might intend.
“Many companies underestimate the payroll implications of employee giveaways,” says Lacey Jarvis, COO at AAA State of Play. “What starts as a simple gesture of appreciation can quickly turn into a compliance issue if it’s not reported correctly. Undereported compensation is a sure ticket to avoidable problems both for your business and your staff.”
In this guide, we’ll help you prevent payroll chaos and stay on the right side of the law. We’ll break down the right way to treat giveaways in your payroll system.
What Counts as a Taxable Benefit?
Not everything you give to employees is automatically considered taxable, but many things are. Figuring out which is which is an essential first step.
The IRS generally treats most giveaways as taxable income, because they’re considered a form of compensation just like wages, bonuses, or commissions. This means, if you give employees something of value in connection with their work, it will likely be subject to payroll taxes.
There is an exception for what’s known as de minimis fringe benefits. These are small-value items given infrequently, where the effort to track them outweighs their value. These could be petty items like a company-branded coffee mug or t-shirt.
Cash and cash equivalents (like gift cards) are always taxable, regardless of the amount.
Best Practices for Reporting Giveaways in Payroll Systems
Once you have figured out what needs to be reported, here are the steps to follow to do this correctly:
1. Put a Dollar Value on Every Item
Whether you’re handing out tumblers or tech gadgets, the most important first step is to determine each item’s fair market value (FMV), which is the amount the item would reasonably sell for on the open market.
For example, if you’re distributing custom-branded t-shirts as part of a company initiative or employee recognition program, make sure their FMV reflects what similar shirts would cost retail, not just your invoice price.
If a branded hoodie would typically retail for $40, but you got it for $25 in bulk, the $40 number is what matters to the IRS.
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2. Feed the Data Into Your Payroll System
This is where things often break down. It’s one thing to hand out swag, but it’s quite another to properly record and report it in your payroll system. If the value of those giveaways is considered taxable, you must enter it into your payroll software just like you would for bonuses or perks.
Some systems let you flag these entries as non-cash compensation, so they’re taxed correctly and show up on W-2s. If you’re working manually, create a clear process for entering values and syncing records with finance, HR, and any third-party payroll providers.
3. Don’t Leave Employees Guessing
Communicate early and clearly about what employees can expect when they receive company swag. Use onboarding documents, team emails, or footnotes on employee payslips to explain that certain items may be treated as taxable income and may then show up on their year-end tax forms. It may not be the most exciting news, but being upfront earns trust and avoids drama later.
4. Build a Simple, Repeatable Logging System
This part will be relatively easy to implement as it can be done in a basic spreadsheet. It would be a good idea to review this log at fixed intervals. We’d suggest monthly or quarterly. If your team gives away lots of items or holds frequent contests or raffles, consider automating the process.
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5. Check the Local Rules (Seriously)
Federal rules are important, but they’re not the only laws you need to pay attention to. State and local tax laws may have their own definitions, thresholds, or requirements when it comes to employee gifts and fringe benefits.
Some states might follow federal guidelines, but others may have stricter reporting rules or offer their own exemptions. To be safe, consider consulting a tax advisor, payroll specialist, or legal counsel before setting any blanket policy.
Final Thoughts
Employee gifts and giveaways can be great for culture, but you need to be careful. Payroll errors can be costly. In this article, we’ve outlined a few key steps that will help keep you protected. To learn more about best practices in modern payroll management, here’s our guide to the importance of payroll software.