Can I Write This Off?

How do I deduct gift cards for employee bonuses on my taxes?

TL;DR

Gift cards given as employee bonuses are generally deductible as a business expense, but they must be included in the employee's taxable income as they are considered cash equivalents.

Detailed Answer

Gift cards given to employees as bonuses are deductible as a business expense under IRS rules, as they are considered a form of compensation. However, because gift cards are treated as cash equivalents, their value must be included in the employee's taxable income and reported on their W-2 form. This differs from non-cash gifts, which may be excluded from income if they fall under the de minimis fringe benefit rules. For example, a $50 gift card given as a holiday bonus is deductible for the business, but the employee must report it as income. It's important to note that the deduction is only applicable if the gift card is given for business purposes, such as rewarding performance or as part of a formal bonus program.

Where to Put It on the Tax Form

Schedule C, Line 26 (Wages) or Line 19 (Pension and profit-sharing plans) depending on how the bonus is categorized in the business's accounting records.

Real World Example

A freelance graphic designer gives each of their two part-time assistants a $100 gift card as a year-end bonus. The designer deducts the $200 total as a business expense on Schedule C, Line 26, and includes the $100 gift card value in each assistant's W-2 form as taxable income.

Audit Risk & Documentation Tips

The audit risk is moderate, as the IRS may scrutinize employee compensation deductions. Keep detailed records, including the date, purpose, and amount of each gift card, and ensure that the value is reported on the employee's W-2 form. Maintain copies of receipts and any correspondence related to the bonus program to substantiate the business purpose.

IRS Reference

IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits

Relevant Industries

Small Business OwnersFreelancersConsultantsRetailers

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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 18, 2025

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