As nonprofits wrap up the year, many express appreciation by giving gift cards, gift baskets, or holiday gifts to employees, volunteers, board members, or community partners. While thoughtful and meaningful, these gifts carry important accounting, tax, and reporting implications that organizations must understand.
The IRS has clear rules around cash equivalents, fringe benefits, and reporting requirements, and nonprofits should ensure their year-end practices remain compliant.
Below is a practical guide explaining how to handle the accounting and tax treatment of holiday gifts given by nonprofits.
1. Gift Cards Given to Employees Are Always Taxable
The IRS treats gift cards as cash, regardless of the amount. This means:
- The full value must be included in the employee’s taxable wages
- Payroll taxes apply
- The amount must be processed through payroll, not accounts payable
- The value should appear on the employee’s Form W-2
Examples: Amazon gift cards, restaurant cards, retail store cards, Visa/Mastercard gift cards.
Important: Gift cards are not considered a de minimis fringe benefit under IRS rules. Even small $10–$25 cards are taxable.
Accounting treatment:
Record the value as a payroll expense (staff appreciation, fringe benefits, or similar category).
2. Tangible Gifts to Employees May Be Nontaxable (If Truly Small)
Nonprofits may give small, infrequent items that qualify as de minimis fringe benefits, such as:
- holiday treats or small gift baskets
- mugs, branded apparel, or small tokens
- flowers or food items
These items are typically not taxable, as long as they are:
- low-value
- occasional
- not a cash equivalent
- not intended to compensate the employee
High-value items (e.g., electronics, luxury baskets) are taxable and must be added to wages.
Accounting treatment:
Record as employee appreciation or staff recognition expense.
3. Gifts to Volunteers or Board Members
Volunteers and board members are not employees, so payroll tax rules do not apply. However, nonprofits must still apply proper reporting and controls.
Gift cards to volunteers/board members:
- Treated as cash-equivalent gifts
- If the individual receives $600 or more in total payments during the year, the nonprofit may need to issue a Form 1099-NEC
Tangible gifts:
- Typically not reportable
- Should be recorded as program expense or volunteer/board appreciation depending on purpose
Accounting treatment:
Record the expense appropriately and track gift card disbursements like cash.
4. Internal Controls for Gift Cards
Gift cards should be handled with the same rigor as cash:
- Keep a log of purchased cards
- Assign responsibility for distribution
- Document who received what card and when
- Avoid keeping unused gift cards in unsecured locations
These internal controls protect both the organization and its employees.
5. Consider Donor Restrictions When Purchasing Gifts
If the nonprofit uses restricted funds, ensure the purchase aligns with donor intent.
For example:
- A fund restricted to “program services” cannot be used for staff holiday gifts
- A restricted grant for “client assistance” cannot be used to buy volunteer gift cards
Misuse of restricted funds is a common audit finding.
6. How to Record These Gifts in Your Financial Statements
Employee gifts (taxable):
- Recorded as payroll expense
Employee gifts (non-taxable tangible):
- Recorded as staff appreciation or fringe benefit expense
Volunteer/board gifts:
- Recorded as program expense, community outreach, or volunteer appreciation, depending on purpose
Gift cards:
- Recorded as a cash-equivalent asset until disbursed
- Expensed when given to the recipient
Why This Matters for Nonprofits
Improper handling of holiday gifts is a common compliance pitfall. Errors can lead to:
- incorrect payroll reporting
- missed tax withholdings
- inaccurate financial statements
- audit findings
- misuse of restricted funds
Having clear policies and accounting procedures ensures consistency, compliance, and transparency.
