The holiday season is here—a time for joy, gratitude, and giving back to the people who make your business thrive. One of the most popular ways to show appreciation is by gifting employees something they’ll truly enjoy. Gift cards are a versatile and thoughtful option, but before you start wrapping them up, it’s important to understand the tax rules that apply.
Open-Loop Gift Cards
Examples: Prezzy Cards, Visa, or Mastercard gift cards
- These cards can be used at a wide range of merchants, giving employees maximum flexibility.
- Tax Treatment: The value of these cards is considered employment income.
- This means they must be processed through your payroll system, with PAYE tax deducted, just like a normal wages payment.
- Tip: Factor in the tax impact when deciding the gift card amount so employees receive the intended benefit.
Closed-Loop Gift Cards
Examples: Mitre 10, Westfield gift cards
- These cards can only be used at a specific store or a limited group of merchants.
- Tax Treatment: Closed-loop cards are treated as non-cash fringe benefits and fall under FBT (Fringe Benefit Tax) rules.
- They may qualify for the “de minimis” exemption if:
- The total value of unclassified benefits for a single employee is less than $300 per quarter (or $1,200 annually for annual FBT filers).
- The total annual value across all employees does not exceed $22,500.
- If these thresholds are exceeded, the full amount is subject to FBT, which the employer must account for.
- They may qualify for the “de minimis” exemption if:
Key Takeaways
- Open-Loop = PAYE through payroll
- Closed-Loop = FBT rules apply (with possible exemptions)
- Always check your totals to avoid unexpected tax liabilities.
Pro Tip: Communicate clearly with employees about the type of gift card they’re receiving and any tax implications. It shows transparency and helps manage expectations.
Wrapping It Up
Gift cards are a fantastic way to spread holiday cheer and show appreciation for your team’s hard work. By understanding the tax rules, you can give generously while staying compliant. So go ahead—make this Christmas special for your employees, and start the new year on the right note!
