As the winter season approaches your employer may want to hold the annual office party. But what does that mean to your taxes? Winning the yearly costume contest may come with a hidden cost. Or, you could be subject to withholding on the annual door prize.
We’ll look at holiday work parties from the employee perspective to see how much tax you could be paying out of your paycheck — unknowingly.
When are work gifts not taxable?
First, let’s explore tax-free employer presents. These gifts are generally not taxed if they are deemed “de minimis,” which means:
- Low in cost (like Christmas turkeys, books, candles, or chocolates) AND
- Infrequent in use (like tickets or a gift certificate for a particular item)
The IRS hasn’t set a strict dollar amount for “low in cost,” though anything over $100 isn’t considered meeting the definition. Entertainment tickets could be de minimis if they are less than $100 and used infrequently.
For example, if your company has a raffle ticket to see “The Nutcracker,” that may be de minimis. The ticket can only be used infrequently and for something specific (i.e. the night of the ballet).
However, if the office raffle is for a season pass to the theater, that would be taxable because there is frequent use. Or, if the ticket is worth more than $100, that would also be taxable.
As you can see from the above examples, “de minimis” may be quite limited. What’s worse, we haven’t yet covered the most popular present given: gift cards.
Gift cards and other employee presents that are taxed
Did you know when you unwrap a gift at work the IRS has essentially already unwrapped it for you?
Employers withhold Social Security tax and other payroll taxes on many gifts you receive — and yes, that includes the occasional gift card.
That’s because all gift cards are generally excluded from “de minimis” since they have a direct cash value. Other examples of taxable gifts include:
- Those worth more than $100, which may be exchanged in Secret Santa or White Elephant
- Recurring presents, like a weekly self-care package
- Cash, prepaid cards, and Christmas bonuses
Taxes you receive on the above contribute to a higher withholding on your Form W-2 at year-end. What’s worse, presents like gift cards are historically underspent. This means you could be paying taxes on something you’ll never use.
So, if you have a choice in accepting a present, consider the tax implications first, especially if the gift is large. You don’t want a surprise on your year-end tax return.
But note: the above list isn’t exhaustive. Withholding on prize-based games can easily be missed, especially if you receive holiday winnings from a craft fair or similar event. Read on.
Are holiday office prizes tax-free?
The IRS considers winnings from bingo, trivia, charades, raffles, and lotteries taxable. That’s true even if the prize is small.
Your employer is responsible for withholding the appropriate taxes on your year-end tax form. But any prizes won outside the workplace, like those you win from church or a holiday fair, are reportable by you. In other words, the responsibility to pay taxes on these winnings falls on the individual.
This means you may need to follow up with the appropriate organization for tax forms or you could risk a penalty for underfiling.
For more information on how to report these winnings, see Kiplinger’s report, Taxes on Gambling Winnings and Losses.
Ideas on how to throw a party with no tax withholding
As we’ve seen, your annual work party may come with a hidden price tag due to unforeseen tax implications. So, how can you potentially avoid a holiday tax?
As an employee, try to get an early jump on planning. If your company sends out an email asking for suggestions, offer a prize-free party with one of the below options instead:
- A silly holiday photo booth with props like candy canes and snowmen
- Bring-your-own gingerbread house decorating party
- Holiday potluck or office lunch
The above could have fewer W-2 withholdings while still providing festive enjoyment. Free can be fun: the proof is in the pudding.
