Cash gift 50% deduction as meals

[thetaxmanyaya]

Hello all,

My business partner classified our holiday gift checks to our employees as meals. They were all under $600. We deducted 50% of these gifts. Is this a legal deduction? 

Thank you

[Opus 17]

No.  Anything you provide of value, whether in cash or not, to your employees as compensation for their services, is considered taxable wages and must be included on their W-2.  The only exceptions are certain fringe benefits provided under the regulations found in publication 15-b. 

15-b includes certain situations in which you can provide meals for your employees and deduct the entire expense as a business expense to you, while not including the value in their taxable wages.  A cash bonus at Christmas time does not fit any of these situations.  

https://www.irs.gov/publications/p15b#en_US_2020_publink1000193706

Therefore, what you should have done was to include the Christmas gift in their box W-2 box 1 wages, where it would be subject to withholding for federal, state, Social Security, and Medicare taxes.  Then, since the entire payment is treated as a wage bonus, the entire amount is a deductible business expense to the business.  

You should probably consult a professional tax advisor, but I suspect that you need to issue corrected W-2s to all your employees who received these bonuses, and you will also need to send the IRS corrected form 941s for your company, As well as filing an amended business tax return. Your employees will all have to file amended tax returns to report the additional wages.

[thetaxmanyaya]

Thank you, that's what I thought...

[Anonymous]

certain de-minimis benefits can be excluded from w-2 but never cash payments except for reimbursements (from iRS publ 15-b)

Examples of de minimis benefits include the following.
• Personal use of an employer-provided cell phone provided primarily for noncompensatory business purposes. 
• Occasional personal use of a company copying machine if you sufficiently control its use so that at least
85% of its use is for business purposes.
• Holiday or birthday gifts, other than cash, with a low
fair market value. Also, flowers or fruit or similar items
provided to employees under special circumstances
(for example, on account of illness, a family crisis, or
outstanding performance). example a turkey or ham what's alow FMV good question.  i suggest $25 becuase that's the value of tax-free gifts/deductible amount for ad items given out to customers and non customers. 
• Group-term life insurance payable on the death of an
employee's spouse or dependent if the face amount
isn't more than $2,000.
• Certain meals. See Meals, later in this section, for details.
• Occasional parties or picnics for employees and their
guests.
• Occasional tickets for theater or sporting events.
• Certain transportation fare. See Transportation (Commuting) Benefits, later in this section, for details