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Can freelancers deduct gift cards for employee bonuses?

TL;DR

Freelancers can generally deduct gift cards given as employee bonuses as a business expense, but these are considered taxable compensation to the recipient, not gifts.

Detailed Answer

Gift cards given to employees as bonuses are deductible as a business expense under compensation, not as gifts. The IRS treats gift cards as cash equivalents, meaning they are subject to payroll taxes and must be reported on the employee's W-2 form. Freelancers should ensure that the gift cards are given for business purposes and that they are reasonable in amount. For example, a $50 gift card given as a holiday bonus is deductible, but it must be included in the employee's taxable income. It's important to differentiate between gift cards given to employees and those given to clients or vendors, which may fall under different rules.

Where to Put It on the Tax Form

Schedule C, Line 26 (Wages) for the deduction; report on employee's W-2 form for income.

Real World Example

A freelance graphic designer gives a $100 gift card to their assistant as a year-end bonus. The designer deducts this $100 as a business expense on Schedule C, Line 26, and includes it in the assistant's W-2 as taxable income.

Audit Risk & Documentation Tips

The audit risk is moderate due to the potential for misclassification. Freelancers should keep detailed records, including the date, amount, and purpose of the gift card, as well as documentation showing it was reported as taxable income to the employee. Save receipts and any correspondence related to the bonus.

IRS Reference

IRS Publication 15-B (Employer's Tax Guide to Fringe Benefits), IRC §162

Relevant Industries

FreelancersConsultantsSmall Business OwnersIndependent Contractors

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Disclaimer: This is for informational purposes only and should not be construed as tax or legal advice. Always consult your tax advisor.

Page created on July 25, 2025

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