The short answer: yes. In the U.S., gift cards from a business are almost always taxable. The IRS treats gift cards as cash equivalent, which means their value counts as taxable income.
But the details depend on who’s receiving the card. A gift card to an employee is taxed differently than one sent to a contractor or a client.
This guide covers the rules for each audience, along with exceptions worth knowing about (like de minimis benefits).
What are the IRS rules on gift cards?
How a gift card gets taxed depends on who receives it and their relationship to your business. Employees, contractors, and clients all have different reporting rules and forms.
| Recipient | Tax form required | Reporting threshold |
|---|---|---|
| Employee (full- or part-time) | W-2 | All amounts |
| Independent contractor or other non-employee | W-9 plus 1099-NEC if threshold reached | $2,000 or more |
| Client | None (deduction capped at $25) | None |
| Friends or family (personal gift) | None | Giver may file above $19,000 |
How are gift cards taxed for employees?
Gift cards from an employer to an employee are generally considered taxable compensation. Whether the employee works full time or part time, the IRS treats gift cards like cash.
That means a few things:
It goes on their W-2: The value of the gift card is included in the employee's annual wage and tax statement (Form W-2).
It’s subject to withholding: Income tax withholding applies to the value of the gift card, just as it does for regular pay.
It may trigger state and local taxes: Depending on where the employee lives and works, the card’s value may be subject to additional state and local taxes.
With gift cards, the math is simple: the cash equivalent value is just the dollar amount on the card. But gift cards aren’t the only form of compensation treated this way. The IRS also considers a variety of other employer-provided rewards and benefits to be cash equivalent and, therefore, taxable.
A few common examples:
Fringe benefits: Perks like using a company car for personal use.
Prizes and awards: Merchandise or experiences given in recognition of performance or service are often taxable, though there are exceptions.
Other non-cash benefits: Health insurance for non-dependent domestic partners, group-term life insurance coverage above $50,000, and educational assistance exceeding $5,250 per year.
So while it’s a pain that gift cards are taxable, most other gifts you give an employee are likely taxable too, according to the IRS.
What are de minimis fringe benefits?
De minimis fringe benefits, governed by Section 132(e) of the Internal Revenue Code, are perks of such small value given so infrequently that tracking them for tax purposes would be unreasonable or impractical. Think things like free in-office snacks, small gifts like flowers or candy, or the occasional ticket to a sporting event.
Here’s the catch: a gift card is never a de minimis benefit, no matter how small. The IRS treats gift cards, gift certificates, and prepaid cards as cash equivalents, so they don’t qualify as de minimis, even at $5.
In other words, a $20 gift card is taxable income, while a $20 box of doughnuts generally isn’t. Same value, different tax treatment. One functions like cash, and the other doesn’t.
What is a tax gross-up?
Want to give employees a gift without adding to their tax burden? That’s what a tax gross-up does. You increase the gift amount so that after taxes are taken out, the recipient is left with the amount you intended.
Most payroll platforms can do the math for you, but it helps to know how it works:
Grossed-up amount = Desired net benefit / (1 − tax rate)
Say you want an employee to receive a $100 gift card, and their tax rate is 30%. A flat $100 gift card would leave them with $70 after taxes. Instead, run the numbers through the formula:
$100 / (1 − 0.30) = $142.86
Now you know to send a $142.86 gift card so that, after taxes, the employee keeps the $100 you intended for them.
A couple of important things to keep in mind:
The tax rate should include federal, state, and local payroll taxes. Rates will vary depending on the person and location.
The grossed-up amount is what you report as compensation and withhold against on forms like W-2s.
How are gift cards taxed for independent contractors and other non-employees?
If you send gift cards to independent contractors or freelancers, they must fill out a W-9 rather than a W-4. After the calendar year closes, you may need to report what you paid on a Form 1099-NEC.
The trigger for that 1099 is a dollar threshold, and it recently changed. For payments made in 2026 and later, you’re required to report once you’ve sent a person $2,000 or more in a calendar year. Prior to 2026, the threshold was $600.
This applies to more than just contractors. If you’ve sent $2,000 or more in gift cards to individuals as payment for participating in research, testing a product, referring customers to your business, or providing other services, you’ll likely need to collect a W-9 and issue a 1099.
As a reminder, the threshold doesn’t change whether the income is taxable. The recipient owes tax on what they receive, regardless of whether you’re required to send a form. The threshold only determines your reporting obligation.
Do the tax rules change based on the amount or purpose of the gift card?
For the most part, no. A gift card is taxable whether it’s worth $5 or $500, no matter what the occasion is.
The amount can affect your reporting, as with the $2,000 contractor threshold above, but not whether the card is taxable in the first place.
There’s one main exception for employees: reimbursing a legitimate business expense. If you give an employee funds to cover a work expense, that reimbursement can be tax-free, but only if it meets the IRS’s accountable plan rules.
How are gift cards taxed for clients?
Gift cards given to clients work a little differently. You don’t need to issue a W-2 or 1099 form. Instead, they're considered a business gift. The tax question is how much of it you can deduct.
Under Section 274(b) of the Internal Revenue Code, you can deduct the cost of business gifts, but only up to $25 per recipient per year. That cap was set in 1962 and hasn’t been adjusted for inflation. Three $25 gift cards to the same client across the year total $75, but still yield only a $25 deduction.
Branded items worth $4 or less, such as pens and keychains with your company name on them, don’t count toward this $25 cap.
Incidental costs like engraving, packing, or shipping also aren’t included in the $25 limit if they don’t add substantial value to the gift.
To claim the deduction, keep records proving the business purpose of the gift and details of the amount spent.
Disclaimer: Tremendous can't provide tax or legal advice. While we've covered the basics of taxes on gift cards here, you should run your plans past your company's tax advisors to be sure you’re distributing gift cards in a way that’s fully compliant and optimized for your situation.
Streamline tax reporting for gift cards
Gift card taxes come down to who’s receiving it, whether the value counts as wages or a business gift, and which form (if any) you need to file. Get those things right, and the rest is mostly recordkeeping.
A dedicated incentive platform like Tremendous that offers automated W-9 collection and 1099 prep can reduce tax-season busywork for you, so you can spend less time reconciling forms and more time rewarding the actions that matter to your business.
