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Is gift cards for employee bonuses a valid tax write-off?

TL;DR

Gift cards given to employees as bonuses are generally deductible as a business expense, but they are considered taxable income to the employee. It's important to follow IRS guidelines to ensure proper reporting.

Detailed Answer

Gift cards provided to employees as bonuses are deductible as a business expense under IRS rules, similar to cash bonuses. However, they are considered a form of compensation and must be included in the employee's taxable income. This means the employer must report the value of the gift card on the employee's Form W-2. The deduction is allowed under the ordinary and necessary business expenses provision, but it is crucial to ensure that the gift card is not classified as a de minimis fringe benefit, which typically applies to items of minimal value that are not cash or cash equivalents. For example, a $50 gift card given as a holiday bonus would be deductible for the employer and taxable for the employee.

Where to Put It on the Tax Form

Schedule C, Line 26 (Wages) or Line 27 (Other expenses) depending on the business structure and how the expense is categorized.

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 $200 as a business expense on Schedule C, Line 26, and reports the $100 gift card as income on each assistant's W-2.

Audit Risk & Documentation Tips

The audit risk is moderate due to the potential for misclassification. To defend this deduction, keep detailed records including the date, recipient, and purpose of the gift card. Ensure the gift card value is reported on the employee's W-2 and maintain copies of these forms. Retain receipts or purchase records for the gift cards as well.

IRS Reference

IRC §162; 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 15, 2025

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