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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. 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 my employer gives me a holiday gift?
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.
What if I received a gift card instead of extra money?
The IRS considers employee gift cards to be a cash equivalent, meaning they do not qualify for the “de minimis” benefit exclusion. As a result, the IRS requires employers to include the gift card amount as part of taxable wages.
Does the IRS provide an explanation for why taxes are required on employer gifts?
Payroll taxes fund vital social programs like Social Security, Medicare and disability insurance. The IRS puts caps on non-taxable forms of compensation to ensure that they collect enough taxes to fund these programs.
Read more:
- Learn more about the payroll rules nannies and caregivers are subject to.
- Read about the benefits you receive by being paid on the books.
- Get advice on how to speak to your employer about being paid legally.
