Companies who are doing well enough to give gifts to employees must remember that the Internal Revenue Code does not treat all gifts the same, says the Littler law firm. “Unfortunately, gifts that employers give to their employees are generally treated as supplemental wages, and thus subject to both payroll and income taxes. This means that the value of the gift must be included in the employee's W-2 at year end and included in a payroll period for purposes of income tax withholding and payroll taxes.”

Littler provides some general rules regarding “gifts” and when employer gifts may or may not be excluded from taxation. For example, “de minimis” fringe benefits (so small as to make accounting for it unreasonable or administratively impracticable) that an employer gives to its employees are not subject to income or payroll taxes. Littler recommends keeping such gifts to $25 or less.