During the holiday season, it's not uncommon for businesses to treat employees with vacation time, holiday parties and bonuses. The type of gift, not the reason for it, determines whether it will be taxable to your employees.
Fruit baskets, turkeys, wine or other inexpensive items are considered noncash gifts. As long as the noncash gift is of nominal value and given infrequently, the gift will be considered a de minimis fringe benefit and will not be taxable.
Expensive noncash gifts, such as watches or iPads, are considered taxable as wages. Cash, checks and gift certificates are also considered taxable as wages. This means that the fair market value of the gifted item or amount must be added to the employee's payroll wages and is subject to typical payroll taxes including FICA and FUTA.
Another way to show appreciation to your employees is by throwing a company party. Good news! The cost is 100% deductible to the business-not just 50% deductible, as with typical meals and entertainment expenses. The party cannot be lavish and extravagant, and must be primarily for employees who are not highly compensated. Attending the party is a nontaxable de minimis fringe benefit to your employees.