The holidays are here, and it’s the perfect time to show appreciation for the people who make your business thrive—your employees, contractors, and clients. But we know that gift-giving as a business owner can feel tricky. So, how do we balance generosity while staying compliant with the IRS?
In this episode, host Danielle Hayden, CPA and founder of Kickstart Accounting, Inc., is here to guide you through the gift-giving process in a way that’s simple, stress-free, and keeps you tax-compliant. From what counts as a deductible gift to thoughtful ways to give your team a boost of morale and company culture, Danielle breaks it all down in an easy-to-follow framework. Whether you’re planning something small or looking to go big, this episode will help you gift confidently and compliantly, all while making your team and clients feel truly valued.
Key Takeaways:
- Follow IRS Gift Rules: Gifts to employees must be tangible and under $75 to remain tax-free, while cash or gift cards are always taxable.
- Use a Gift-Giving Framework: Clarify your motivation, identify the recipient, consider the perceived value, and ensure the gift aligns with IRS limits.
- Make Payroll Gifts Meaningful: Create special moments around payroll-based gifts with personalized communication or gross-up amounts to cover taxes.
- Document for Deductions: Keep detailed records of all business gifts, including cost, recipient, and purpose, to ensure tax compliance.
- Consider Personal Gifting Options: Use owner’s draws for personal generosity while ensuring compliance with salary requirements for S Corp owners.
Topics Discussed:
What Qualifies as a Business Gift (00:00:50 - 00:01:25)
Framework for Business Gift-Giving (00:02:17 - 00:04:36)
IRS Rules for Gifts to Employees (00:05:03 - 00:08:38)
IRS Rules for Gifts to Contractors & Clients (00:08:39 - 00:10:18)
Gift Recordkeeping (00:12:09 - 00:13:01)
Giving Gifts with Owner’s Draws (00:13:28 - 00:15:21)
Resources:
Free Guides | https://kickstartaccountinginc.com/Gift/
How to Pay Yourself as a Business Owner
6 Tax Tips Every Business Owner Should Know
Book a Call with Kickstart Accounting, Inc.:
https://kickstartaccountinginc.com/book
Connect with Kickstart Accounting, Inc.:
Instagram | https://www.instagram.com/Kickstartaccounting
YouTube | https://www.youtube.com/@businessbythebooks
Facebook | https://www.facebook.com/kickstartaccountinginc
Episode Transcript
00:00:00:00 - 00:00:22:14
Danielle Hayden
The holidays are here. And if you are a business owner thinking about giving gifts to your employees, contractors, or clients, but you're worried about messing up with the IRS, this episode is for you. Today we're going to dive into exactly how to make gift-giving simple and stress-free. We're going to walk through what's allowed, what's deductible, and how to avoid tax trouble.
00:00:22:15 - 00:00:44:09
Danielle Hayden
I have a straightforward framework to help you figure out what to give and handle it the right way. You're listening to Business by the Books, the podcast that teaches you how to use your financials to manage your business. My name is Danielle Hayden, CPA and founder of Kickstart Accounting, Inc., where we use bookkeeping and tax as a vehicle to help business owners take control of their numbers.
00:00:44:09 - 00:00:50:06
Danielle Hayden
And I've helped thousands of entrepreneurs make informed financial decisions for over a decade.
00:00:50:08 - 00:01:25:20
Danielle Hayden
Let's start from the beginning. What is a gift? The IRS has very specifically given us guidance on what is a gift. Now, only tangible items count as business gifts. It is only physical items. I want to read this definition from the IRS website. A gift is where the value of which is so small in relation to the frequency with which it is provided, that accounting for it is unreasonable or administratively impractical.
00:01:25:22 - 00:01:54:07
Danielle Hayden
So the IRS is saying anything that you give to your employees, contractors, it needs to go through payroll. It needs to be included in compensation. The only time that you can give your employees something that's not through payroll is things that are low value, infrequent things that your employees should not expect on any type of regular basis. They're supposed to be small tokens for special occasions.
00:01:54:09 - 00:02:23:17
Danielle Hayden
A t-shirt, coffee mug, flowers, a cupcake, turkey or ham. A nice bouquet, right? These are very small, tangible items. Cash and gift cards are taxed. I want to repeat that. Cash and gift cards are taxed, so we really want to steer clear of those if we want to keep our payroll simple as an employer. All right. Let's go through the framework that you can apply every time you're thinking about giving gifts.
00:02:23:18 - 00:02:48:04
Danielle Hayden
Now we're airing this episode at the holiday season because this is a time where businesses want to give back to their employees and their contractors, clients. However, just understand that these rules are 365 days a year, no matter what. These are the rules by the IRS. And also I want to say don't shoot the messenger. The IRS needs to make some updates.
00:02:48:05 - 00:03:12:20
Danielle Hayden
I don't necessarily agree with these rules. However, I want to make sure that all of you have the ability to stay compliant and the information that you need to make decisions as a business owner. All right. So step one in the framework is to determine why you are giving a gift. Are you trying to motivate your employees to either work harder or to say thank you for work that has been done?
00:03:12:22 - 00:03:41:05
Danielle Hayden
Are you trying to encourage productivity or build morale and the culture of your organization? Right? Do we want to build a team where employees know and understand that they are valued? Right? We want people to feel valued. Or are we, as the manager, the business owner, are we individually feeling generous? So it's really important to understand are you, the business owner, generous and feeling generous and you want to give back?
00:03:41:05 - 00:04:09:01
Danielle Hayden
Or is your company giving back and are they providing the value? Is your company creating the culture and the morale within the organization? So what is the reason we are giving the gift? Step two, who are you giving the gifts to? Either gifts for employees, contractors, or clients? Step three, what is the perceived value of the gift? Right?
00:04:09:06 - 00:04:36:15
Danielle Hayden
Do we want them to actually receive something? Or do we want to have the gift being given through compensation? So how do we want the gift to actually be perceived by that individual? And then lastly, step four is that then we can determine the value of the gifts and the actual specific item, right? Are we going to give a tangible item or are we going to give a bonus for the gift?
00:04:36:15 - 00:05:03:00
Danielle Hayden
Right? So step four is to determine the actual value of the gift. And those very specific action steps to give the gift. Now I want to go through specifically the tax rules and how they build back into the framework. So the IRS says for employees we can give gifts up to $75. So gifts that are more than $75 are taxable.
00:05:03:02 - 00:05:39:02
Danielle Hayden
Now keep in mind all cash or gift cards that can be redeemable for cash are taxable to the employee, even when they're given as a gift. So no matter what, if you are giving cash or gift cards, they should be included as compensation for that team member. And we can give up to $75 in tangible objects such as a holiday turkey, flowers, candy arrangement, cupcakes, a meal we can give gifts to like non-cash gifts to employees up to $75.
00:05:39:03 - 00:06:18:01
Danielle Hayden
Now, what other limit that the IRS gives us as business owners, that the tax-free value is limited to $1,600 for all awards to one employee in a year. So gifts are awarded for lengths of service or achievements that might not be taxable. They can be considered part of the gift up to $1,600. So just a reminder, gifts that are awarded for length of service or achievement are not taxable, so long as they are not cash, gift cards, or points redeemable for merchandise.
00:06:18:02 - 00:06:52:15
Danielle Hayden
Its tax-free value is, however, limited to $1,600 for all awards to one employee in one year. So I want you to have that specific amount in your mind. So each individual gift can be up to $75 and the total for one year is $1,600. So that is the rules for gift giving to employees. So step one, we have determined that we want to give back to our employees during this holiday season to help that employee feel valued and create culture in our company.
00:06:52:15 - 00:07:15:04
Danielle Hayden
Step two, we know who we're giving the gift to is employees. So step three, we need to understand what is the perceived value of the gift. Do we want to give them an actual tangible gift, or do we want to give them something through compensation? If we're going to go over $75, then it's really important that we're giving this in compensation.
00:07:15:04 - 00:07:42:04
Danielle Hayden
So if we want to give a $300 holiday gift to each of our employees, that would need to go through payroll. If we are giving a small sweatshirt and mug that's branded with the company logo, then we could give to each team member up to $75. There are ways to make gifts via payroll feel really special. So I know for some people they say, you know, gifts within payroll don’t feel as meaningful.
00:07:42:05 - 00:08:03:05
Danielle Hayden
There are ways to make bonuses through payroll feel deeper, right? We can have a very specific conversation with each team member for a company-wide meeting saying, thank you for your hard work and your service this year. There's going to be an off-cycle payroll run. So it's outside of that typical payroll, that typical paycheck that they're receiving.
00:08:03:06 - 00:08:29:18
Danielle Hayden
So it can feel more special. And keep in mind, you know, that your employees are going to be paying tax on this compensation. And so you can back into the dollar amount. So if you know that you want each team member to take home $200 net, you can work with your team so that you are paying the taxes on that amount so that they're taking home the $200 and you, as the employer, are paying the taxes on that piece.
00:08:29:18 - 00:09:02:16
Danielle Hayden
Right? So you're just grossing it up a little bit so that you can determine the amount that you want them to actually take home so that there is some flexibility there in payroll. All right. So if we are giving gifts to our contractors, all contractors, anything that is given through cash needs to be reported on the 1099. You don't need to report if you send them a birthday cake, company mug, obviously, but if you are sending them cash or gift cards, it is reported on the 1099.
00:09:02:21 - 00:09:27:10
Danielle Hayden
So just like an employee, our 1099 contractors will also need to be reported. All right, let's talk about gifts to clients. The IRS, not generous at all, but is even less generous when it comes to giving companies a break on these gifts and the limits so businesses can only deduct $25 and gifts per person per year. My goodness.
00:09:27:10 - 00:09:57:06
Danielle Hayden
So the $25 limit applies whether the gift is given directly to an individual customer or indirectly to the company, but it is intended for individuals. So the IRS says that we can only give gifts to clients for up to $25 per person. Now, the one place the IRS does give us a break is that it does not include shipping and handling, so if we want to have something engraved and then shipped, the $25 is just the specific item.
00:09:57:06 - 00:10:18:18
Danielle Hayden
And then on top of that, we can pay for shipping and handling and the engraving, let's say. And that does not include it in the specific item, right? So luckily the IRS is giving us a little bit of leeway on shipping and handling because it is an arm and a leg to ship just about anything. So if we had to include the $25 with shipping, I don't think we would be giving anything.
00:10:18:21 - 00:10:48:01
Danielle Hayden
All right. I want to touch on tips for a moment. If an employee receives more than $20 of tips in any month, then the employee needs to report the receipt of the tips to the employer so that the employer can withhold the proper amount and report the tips as wages for the employee. This is really important for any of our team members who are going to be receiving tips or gifts directly from clients.
00:10:48:01 - 00:11:15:03
Danielle Hayden
The employee will then report those tips over $20 to the employer so that it can be included in compensation. Now, here's what I'll say about this. I know this feels really harsh. I actually remember-- So for anyone who doesn't know my past life, I was a hairstylist. So I did hair right out of high school and I remember this change coming from the IRS, where we then had to report all of our tips.
00:11:15:08 - 00:11:37:20
Danielle Hayden
And I was so angry. Why do I have to pay taxes on this cash that I'm receiving as a gift from my clients? However, when we go and apply for a loan, when I went to go purchase my vehicle, when I applied for my house loan, I was so thankful that I had been reporting tips on my payroll, so I was actually
00:11:37:20 - 00:11:40:04
Danielle Hayden
able to be approved for that loan.
00:11:40:04 - 00:12:09:04
Danielle Hayden
So I know as business owners, we want to protect our team members and say, no, I don't want you to have to pay taxes on that. There is a benefit to paying the taxes, right? So just something to keep in mind as we're looking at the tips directly from our clients to our team members. Now as employers, the good news is that all of these gifts and awards, regardless of whether or not they are taxable to the employee, are deductible as expenses for employers.
00:12:09:04 - 00:12:34:11
Danielle Hayden
You do need to track your business gifts, though. So as with just about everything else in business, we have to have accurate records. This is why we practice solid bookkeeping, and there is no difference here. If you want to write off your gifts, you need to be able to show the IRS what you bought. So when you're tracking your business gifts this year, I want you to jot down the following, how much you spent on the gift, a description of the gift,
00:12:34:13 - 00:13:01:13
Danielle Hayden
when you purchase the gift, who you are giving the gift to, and your relationship to that person, and the reason that you're giving the gift. We need to have good recordkeeping for our businesses, and this includes gifts. So let's recap these limits for gifts. If we are giving a gift to an employee, we can give them a tangible item, a specific product up to $75.
00:13:01:13 - 00:13:28:21
Danielle Hayden
If we are giving a client a gift, our limit is $25. Either way, it does not include shipping and handling, so we can send in gifts within these limits, plus shipping and handling. All cash and gift cards are taxable, right? All cash and gift cards are taxable for the employee. If you, the business owner, would like to gift, you are feeling generous,
00:13:28:21 - 00:13:52:15
Danielle Hayden
back to our motivations in step one. If you, the business owner, are feeling generous and you want to give that employee a gift that they're not going to have to pay taxes on, that's great, and I'm so excited for you, but that generosity is kind of have to come from you, not your business. So you can take those funds as an owner’s draw and then gift those to your employee.
00:13:52:21 - 00:14:16:21
Danielle Hayden
Those are coming from you and not your business. Just to talk logistics of that for a moment. As an LLC, remember we did a whole series on how to pay yourself as an LLC and the logistics behind that. You can take as much owner’s draws as you want, so feel free to take an owner's draw at the holiday season, and then you personally can gift your employees and contractors.
00:14:16:21 - 00:14:38:12
Danielle Hayden
You are not going to pay the payroll tax on those dollars. You will, however, pay taxes on the net income of your business. So these gifts, this compensation that you're taking will not lower your net income, and therefore you will be paying the taxes on your net income of your business. So you'll take those as an owner’s draw, create the transfer to your personal checking account,
00:14:38:12 - 00:15:03:02
Danielle Hayden
and then your generosity can be given from you personally. Now, if you are an S Corp, this is really important. So please listen up. We are seeing so many of our clients, so many people who we've talked to who have not paid themselves a reasonable compensation. If you have not paid yourself a reasonable compensation yet this year, do not take an owner’s draw to gift your employees or contractors personally.
00:15:03:03 - 00:15:21:20
Danielle Hayden
You have to pay yourself as an S Corp a reasonable compensation. Once you've paid yourself that amount, you can take as much owner’s draws as you want, and you can be as generous as you like. But do not take out an owner's draw until you've paid yourself a reasonable compensation. Real quick.
00:15:21:23 - 00:15:42:12
Aubrey Philipp
Real quick. Are you struggling with tax deductions or how much to pay yourself as a business owner? Get the “How Much to Pay Yourself as a Business Owner Calculator” and the guide to “The 6 Tax Tips Every Business Owner Should Know”. Go to KickstartAccountingInc.com/Gift to simplify your financials today.
00:15:42:14 - 00:16:01:15
Danielle Hayden
Again, this is a lot. I know this is a lot, so if you need help we would love to help you. We are on a mission to help business owners understand their numbers so they can better manage their business. And we are here for you as well. If you are a Kickstart Accounting client and you need help, don't forget to contact your money team.
00:16:01:17 - 00:16:15:23
Danielle Hayden
We are here to have regular calls with you and answer your questions. All right, don't forget to hit like and subscribe! We have so much content and amazing guests for you. I don't want you to miss a thing.
00:16:16:01 - 00:16:33:06
Danielle Hayden
Thank you for listening to today's episode of Business by the Books. If you are a business owner who needs a money team, I invite you to go to Kickstart Accounting Inc. dot com or click the link in the show notes and come and book a discovery call. The Kickstart team and I are here to be a resource
00:16:33:06 - 00:16:36:03
Danielle Hayden
for you on your entrepreneurial journey. We want to take
00:16:36:04 - 00:16:38:11
Danielle Hayden
bookkeeping off of your plate and help
00:16:38:11 - 00:16:58:02
Danielle Hayden
arm you with the information you need in your business so that you can put this financial information to the test and make strategic business decisions to grow and thrive in your business.