Gift cards as "gratuities"
October 16, 2017 6:33 PM Subscribe
YANML. I know that dollar-value-equivalent gift cards given to employees as a bonus, gift, or award are considered taxable income under US law. Mostly, I've seen this in the context of "Widget Inc. is giving each of its employees a $100 gift card to Acme Stores, as a holiday bonus." But what about when Widget, Inc. gives its employees gift cards to Widget, Inc.? What about when Widget charges the cards to a customer's credit card in place of an agreed-upon "gratuity"?
Long version: let's say I authorized Widget to charge my business credit card for the $1350.00 base cost of an event. Upon satisfactory completion of the event, I authorized Widget to charge an additional 20% gratuity of $270.00, to be divided equally amongst the three Widget staff members who assisted our team (staffers' names and distributions were indicated on the memo line of the authorization form).
Suppose I got a thank-you email citing the "generosity" of this "gratuity," but the itemized receipt (received separately) said I had paid for three Widget "gift cards" in the amount of $90.00 each -- and recipients were not specified.
Researching the matter, I noticed that Widget Inc.'s gift cards can be spent only at Widget, and they cannot be refunded nor redeemed for cash. Assuming the cards were actually issued to the three Widget employees I named, Widget must report the value of those cards as taxable income for those employees. Ergo, said employees could be dinged for income tax on those cards, even though the revenue from those cards goes right back into Widget's coffers.
That strikes me as effed-up, but ethics aside: would this practice be legal in the United States? Business took place in Utah, in case that affects anything, but Widget is a national retail chain headquartered in Washington state.
(Obviously, there is also the matter of whether my authorization for a "gratuity" constituted consent to pay for Widget Inc.-branded gift cards. My own employer's procurement policy prohibits this, but I welcome any remarks on the broader legality of such a practice as well.)
Long version: let's say I authorized Widget to charge my business credit card for the $1350.00 base cost of an event. Upon satisfactory completion of the event, I authorized Widget to charge an additional 20% gratuity of $270.00, to be divided equally amongst the three Widget staff members who assisted our team (staffers' names and distributions were indicated on the memo line of the authorization form).
Suppose I got a thank-you email citing the "generosity" of this "gratuity," but the itemized receipt (received separately) said I had paid for three Widget "gift cards" in the amount of $90.00 each -- and recipients were not specified.
Researching the matter, I noticed that Widget Inc.'s gift cards can be spent only at Widget, and they cannot be refunded nor redeemed for cash. Assuming the cards were actually issued to the three Widget employees I named, Widget must report the value of those cards as taxable income for those employees. Ergo, said employees could be dinged for income tax on those cards, even though the revenue from those cards goes right back into Widget's coffers.
That strikes me as effed-up, but ethics aside: would this practice be legal in the United States? Business took place in Utah, in case that affects anything, but Widget is a national retail chain headquartered in Washington state.
(Obviously, there is also the matter of whether my authorization for a "gratuity" constituted consent to pay for Widget Inc.-branded gift cards. My own employer's procurement policy prohibits this, but I welcome any remarks on the broader legality of such a practice as well.)
You intended to tip to be a tip.
Tips are always taxible income, but the distribution of this tip seems unethical at best.
Contact the local labor board or consumer relations board and ask if this is illegal in your jurisdiction . In some places, how tips are distributed is highly regulated, in other places not so much.
posted by AlexiaSky at 8:25 PM on October 16, 2017 [3 favorites]
Tips are always taxible income, but the distribution of this tip seems unethical at best.
Contact the local labor board or consumer relations board and ask if this is illegal in your jurisdiction . In some places, how tips are distributed is highly regulated, in other places not so much.
posted by AlexiaSky at 8:25 PM on October 16, 2017 [3 favorites]
Response by poster: Clarification-non-threadsittum: I am aware that tips are always taxable income, just not clear on whether it's legal in the above-mentioned jurisdictions for an employer to carry out the above-mentioned manipulation of the above-mentioned revenue.
Widget, Inc. is a retail chain that offers enrichment classes/hobby-relevant equipment, not a convention site. Thanks!
posted by armeowda at 9:28 PM on October 16, 2017
Widget, Inc. is a retail chain that offers enrichment classes/hobby-relevant equipment, not a convention site. Thanks!
posted by armeowda at 9:28 PM on October 16, 2017
Is it possible that the employees did actually get money instead of those gift cards? That could have just been their way of running a transaction for the specified amount through their system. Gift cards could be the only untaxed variable-priced item in their POS system, for example.
posted by jimw at 10:45 PM on October 16, 2017 [1 favorite]
posted by jimw at 10:45 PM on October 16, 2017 [1 favorite]
Assuming the cards were actually issued to the three Widget employees I named, Widget must report the value of those cards as taxable income for those employees.
This is the one gap in your assumptions. I think not declaring and paying this as a tip is super sketchy, but gift cards that aren't redeemable for cash are an employee benefit where there's a de minimis rule in place. $90 is high for the guidelines I've seen on that, but not so high that I think it'd be impossible. Issuing gift cards instead of tips is questionable and not something I've ever heard of anybody doing, but my first thought on reading this situation was that they were trying to use the de minimis rule to get around this being taxable for the employees. I'm not saying that's okay, just that if you take the tipping part out, employers giving employees gift cards is not inherently bad/wrong and the value of those gift cards may or may not be taxable depending on the amount given.
posted by Sequence at 10:46 PM on October 16, 2017
This is the one gap in your assumptions. I think not declaring and paying this as a tip is super sketchy, but gift cards that aren't redeemable for cash are an employee benefit where there's a de minimis rule in place. $90 is high for the guidelines I've seen on that, but not so high that I think it'd be impossible. Issuing gift cards instead of tips is questionable and not something I've ever heard of anybody doing, but my first thought on reading this situation was that they were trying to use the de minimis rule to get around this being taxable for the employees. I'm not saying that's okay, just that if you take the tipping part out, employers giving employees gift cards is not inherently bad/wrong and the value of those gift cards may or may not be taxable depending on the amount given.
posted by Sequence at 10:46 PM on October 16, 2017
Response by poster: Is it possible that the employees did actually get money instead of those gift cards?
Seems unlikely, because the receipt includes four-digit extensions of the company's 19-digit serial numbers for each card. I have far more evidence that the cards exist than that they were given to the "tipped" employees, but regardless, I didn't say "hey, use my card to buy some gift cards," and the receipt is the only way to document what the money was used for.
It also seems like a really bad idea for Widget to log employee income as "gift card sales" in their POS software, just from an audit perspective.
Regarding de minimis fringe benefits: in the view of the IRS, there is no such "floor" for dollar-equivalent gift cards. They are income, they are reportable, they are taxable.
Once again, taxability of cash-equivalent tips/benefits is not in question; it's whether the merchant has the legal right to divert those (taxable!) employee tips/benefits back into its own coffers in this way, or whether this is tantamount to illegally disguising/controlling employee compensation as revenue for the company.
I'll pipe down now, I swear.
posted by armeowda at 2:04 AM on October 17, 2017
Seems unlikely, because the receipt includes four-digit extensions of the company's 19-digit serial numbers for each card. I have far more evidence that the cards exist than that they were given to the "tipped" employees, but regardless, I didn't say "hey, use my card to buy some gift cards," and the receipt is the only way to document what the money was used for.
It also seems like a really bad idea for Widget to log employee income as "gift card sales" in their POS software, just from an audit perspective.
Regarding de minimis fringe benefits: in the view of the IRS, there is no such "floor" for dollar-equivalent gift cards. They are income, they are reportable, they are taxable.
Once again, taxability of cash-equivalent tips/benefits is not in question; it's whether the merchant has the legal right to divert those (taxable!) employee tips/benefits back into its own coffers in this way, or whether this is tantamount to illegally disguising/controlling employee compensation as revenue for the company.
I'll pipe down now, I swear.
posted by armeowda at 2:04 AM on October 17, 2017
IANAL, but it seems that you specified "charge me for a tip," not "charge me for a card that can only be spent in one place;" I think you didn't get what you ordered from Widget Co.
Wether the tip was a gift card for Amazon or iTunes or Starbucks doesn't matter - you didn't authorize paying for a gift card for a specific location. Ignore the tax issue and what the employees received; you agreed to pay for one thing, and Widget charged you for something else.
posted by ErisLordFreedom at 11:43 AM on October 17, 2017 [2 favorites]
Wether the tip was a gift card for Amazon or iTunes or Starbucks doesn't matter - you didn't authorize paying for a gift card for a specific location. Ignore the tax issue and what the employees received; you agreed to pay for one thing, and Widget charged you for something else.
posted by ErisLordFreedom at 11:43 AM on October 17, 2017 [2 favorites]
I am not your lawyer, and I do not specialize in this type of law, but I agree with Eris. There probably isn't a law that you can point to that says "companies may not redirect customer-provided tips into company gift cards." Rather, I think the best way to look at this is that you may have been defrauded by Widget Inc., in that they used the money you provided for a purpose other than what was agreed to.
posted by Pfardentrott at 4:07 PM on October 17, 2017 [1 favorite]
posted by Pfardentrott at 4:07 PM on October 17, 2017 [1 favorite]
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If it were me, I would be furious that the company had essentially awarded that money to itself when it was intended for individual employees to use freely. However, depending on the context, Widget's policy may not allow employees to accept tips from third parties. (I feel like outside tipping is tolerated for entertainment companies, but might be seen as weird for, say, conference organizers.) In that case, it should have so informed you and declined to accept the money to begin with. As it is, without consulting the case law, I suspect that you might have a civil action for conversion, though it would be weird to bring suit over such relatively small sums.
posted by praemunire at 6:59 PM on October 16, 2017 [2 favorites]