The holiday season is a common time for employers to show their employees how much they appreciate their hard work and care throughout the year. Just as many companies give their employees a gift or end-of-year bonus payment, it’s pretty common for families with a nanny or senior caregiver to do the same. Believe it or not though, there are IRS rules for handling a bonus payment or a gift, so it’s important to understand why your payroll looks differently than what you’re used to seeing.
Below are the answers to four common questions we hear from employees whose employer is generous enough to treat them to a year-end gift or bonus:
I received a bonus, but there are taxes taken out of it. Why is that?
Any amount of cash or payment given to you by your employer is subject to taxes because it’s considered part of your income. Generally, employers put an extra line item on your paycheck showing a bonus, but if you look closely at your total earnings for that pay period, it will be higher than usual to account for the bonus.
What if I received a gift card instead of extra money?
The IRS doesn’t make a distinction between cash and gift cards, so a gift card is treated like another form of income. You’ll have taxes taken out of the value of it, just like if it was part of your normal pay for the week.
What if my employer gives me a holiday gift that isn’t money or a gift card?
This is where taxes may or may not come into play. The IRS uses a term called “de minimis fringe benefits” to describe a gift that is infrequent and small enough in value that it doesn’t have to be reported as income. They use an example of a $100 gift not meeting this definition so your employer should use that as a budgeting guide if they’re trying to avoid getting taxes involved in it. But if you’re rewarded with something like an expensive car detail or a day at the spa, chances are that you’ll see taxes taken out of that gift.
Why is it important to tax bonuses or gifts at all?
The IRS has these rules in place so employers can’t simply say that all employee wages are gifts. If this was allowed, neither you nor your employer would ever owe any payroll taxes. Whether we like them or not, payroll taxes fund things like Social Security, Medicare and public services that are vital to our society’s well-being.
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