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Payroll Tip-Employee Gifts, What’s Taxable and What’s Not?

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Employee gifts or awards, are often given in recognition for a job well done, however, some gifts are considered taxable and must be included in payroll.  Keep the following in mind as you start a new payroll year.

employee gifts - taxable or not>Gifts, prizes, and awards for production, attendance, efficiency or other on-the-job achievements must be included when calculating overtime pay.

If the prize or award is a merchandise bonus, you must use the fair market value of the item – NOT the cost; to compute overtime pay.

If your company throws a holiday party – perhaps a Christmas party, for employees and their families; the company can deduct 100% of the cost at the end of the year on your tax return.  The cost of the party is not taxable to employees or their families.  And the same rules apply to a New Year’s Eve cocktail party.

Your company can give each employee a turkey, a ham, or a gift basket as a holiday gift without worrying about it becoming taxable or having to include it in payroll.  On the other hand, if you give your employees a gift certificate for a turkey, a ham, a gift basket or even a $5.00 pen, then it becomes taxable.

Even a simple $10.00 bonus is subject to taxes and must be included when calculating payroll taxes.

Length of service awards, given before 5 years of service are taxable.  The same award is not taxable for more than 5 years of service, but you cannot give them more frequently than every 5 years.

Rewarding your employees for a job well done is a good moral booster and makes them feel appreciated.  Make sure that you know the rules regarding taxability; so nothing comes back to bite you later.

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About Your Host:

Nancy Smyth, Certified QuickBooks ProAdvisor

Nancy Smyth, Sunburst Software Solutions, Inc.
QuickBooks Construction & Payroll Expert


I've been using and supporting QuickBooks products since the early 1990's. I've worked with thousands of contractors, assisting them with QuickBooks setup, Certified Payroll Reporting requirements, AIA Billing and Weighted-Average Overtime.


QuickBooks is a powerful product, but learning how to use it in your construction business can be difficult. I hope you find resources available here to be helpful.

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