Gift cards – popular employee rewards, but what does the IRS say?

by on May 8, 2009 · 0 Comment POSTED IN: HR Info Center

Uncle Sam takes the reward out of this employee reward

‘Closed’ cards redeemable for specific merchandise can solve tax issue . A growing number of employers hand out gift cards as part of their employee reward programs – but do they all know the tax implications?

First Data Corp., an electronic payment solutions provider, has just released a survey showing that 33% of HR professionals plan to boost the use of gift cards as an employee reward for their workers. The survey, of 501 HR people at firms with 100+ employees, also found that companies already using gift cards spend 49% of their incentive budget on them.


But there’s a potential problem: As far as the IRS is concerned, certain gift cards given as an employee reward amount to cash wages – and thus are subject to withholding.

These are the so-called “open” cards that can be used to buy a range of goods from the establishments that issue them – such as department stores, home improvement stores, book and music stores, and restaurants. (The First Data survey shows that 62% of single-establishment gift cards are for retailers, and 24% for eateries.)

If you’ve been giving these kinds of gift cards without withholding on them, you’re probably out of compliance. And if you do withhold, you may risk diluting employee satisfaction. This may not present a huge problem for you. If it does, there’s another solution.


Some retailers will sell you gift cards tied to a specific bundle of merchandise. These “closed”cards, it appears, pass muster with the IRS, because they represent the kind of “tangible personal property” the Feds allow employers to give employees – for holidays or general recognition – without tax liability.

One HR practitioner reports using gift cards from a popular video store chain that provide recipients with two movie rentals, a tub of popcorn and two drinks. Because recipients can’t spend the card for other purposes, it’s kosher with the tax police.

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