During the holidays, it is not uncommon for employers to reward their employees with gift cards to purchase a turkey, ham or some other food items for a holiday dinner.

In the “olden” days, companies used to distribute turkeys or hams, but no more. Not surprising, this tradition generated assorted legal claims: Religious discrimination (Giving a ham violates certain religious beliefs against eating pork.) Racial discrimination (Thanksgiving stands for the genocide of native peoples.); Workplace Harassment (An employee who was a vegan felt harassed when asked if they would like a ham or a turkey.); and Personal Injury (A family member of the employee choked on a turkey bone and sued the employer who provided the turkey.)

Not to be outdone by lawyers, the IRS has ruled that those gift cards for food are wages and are subject to national, state and (in some cases) municipal taxes, plus withholding for Social Security and Medicare.

According to the IRS, gift cards are cash equivalents. This means that they are usually treated as taxable income to the employees who receive them. According to the IRS Publication 15-B (Employer’s Tax Guide to Fringe Benefits), gift cards that can readily be converted to cash are to be treated as wages, paid as cash payments and are subject to federal income tax withholding, Social Security, and Medicare.

A Safe Bet for Employers.

Considering the ruling from both the IRS and most state agencies, it is prudent for employers to withhold taxes when providing gift cards to employees. To stay on the safe side of compliance, employers might consider grossing up the value of the gift card to cover the withholding tax, ensuring that the employee receives the full value of the gift.

Rather than letting the IRS “cook your goose” this holiday season, make sure you report those gift cards to Uncle Sam.

This article is being provided to you for informational purposes only. It is not intended to provide legal or tax advice. Please check with your tax advisors to be certain what options work best for you.