Employee Gift Cards.

Many companys attempt to reward employees during the holidays. But be cautious -

There’s a common misbelief that the IRS considers gift cards worth $20 or less de minimus benefits and, thus, they’re tax free. Unfortunately, that’s not true.  With few exceptions, the IRS considers almost anything with cash value a taxable form of compensation.

Practically speaking, the IRS is unlikely to go after your firm or an staff member over several small-value gift cards for which you withheld no taxes. But they could, specifically if your firm regularly hands out gift cards.  

At some firms, those $5 to $20 cards can add up to a few thousand dollars worth of uncompensated taxes in a few years. Each $15 gift card would typically require about $5.55 withheld.

To be safe, you are able to use gift cards sparingly and pay the tax for the recipient. Or else you are able to educate folks proactively that Uncle Sam requires you to take out for taxes.

Read the fine print

Gift cards could be money-wasters or or morale-killers when employees have a bad experience trying to redeem them. Read the fine-print before you purchase. Three common pitfalls to watch -

• expiration dates. Some retailers offer cards that last forever. But many have expiration dates, rendering the cards worthless after a period of time

• dormancy fees. A $50 card can end up worth only $40 at stores that deduct “dormancy fees” after a certain period of time, and

• redemption fees. Some stores charge a fee for redeeming cards that could be used in multiple locations.

The good news -  There are some good deals out there. Employer use of gift cards has doubled since 2001, and related sales bring in $20 billion a year to retailers. With such fierce competition, it compensates to shop around.