The end of the year is a traditional time for employers to give something extra to their employees, either in the form of holiday gifts or cash bonuses. However, even though such gifts are given in the spirit of the season, the IRS may, Scrooge-like, extract its percentage in the form of income taxes.

Although most gifts given have no tax consequences, gifts that employers give to their employees may be treated as supplemental wages, and thus subject to payroll and income taxes and inclusion in the employee's year end W-2 form. This is because the gift is not seen as given voluntarily, with no strings attached. Courts have generally found that the employer's intention in giving a "gift" is to reward past performance or as an incentive for future performance, and therefore it is viewed as additional taxable compensation.

Not all gifts to employees are taxable, with the size and the form of the gift being the defining criteria. Cash bonuses are clearly taxable and need to be treated as wages for purposes of tax withholding, Social Security, Medicare and other employment taxes. Also taxable are cash equivalents such as gift certificates or the increasingly popular gift cards. On the other hand, the Internal Revenue Code provides that nominal gifts or de minimis fringe benefits are not taxable, mainly because of administrative impracticability.

Considered a nominal gift would be items such as a turkey, ham or fruit basket, occasional theater or sporting event tickets, flowers when there is an illness or death, and group meals or picnics for employees and their families. The IRS deems the cost of occasional parties, such as holiday dinners, to be non-taxable to employees and their families when they are for the purpose of promoting employee goodwill. The cost of such parties is fully deductible to the employer and not subject to the 50 percent limit on business meals.

If your organization plans on giving taxable gifts to its employees, communicate with the payroll department so that the amounts of the gifts are included in the employees' wages on or before the last payday of the year and appropriate employment taxes are withheld.

As a general guideline: