Tax Treatment of Gifts, Dividends, or Loans to Employees

Tax Treatment of Gifts, Dividends, or Loans to Employees

By Mary Howley Esq.

Although gifts are generally excluded from income, gifts from employers are generally included in income subject to certain exceptions. Payments labeled as compensation may be determined to be dividends, while payments labeled as a loan or payment for property may be determined to be compensation. This Analysis discusses factors to be taken into account in determining whether payments to employees are compensation or gifts, dividends, or loans.


Compensation versus Gift 

     Gross income generally does not include the value of property acquired by gift. Amounts transferred by or for an employer to or for the benefit of an employee, however, are not considered gifts and are includable in gross income. Exceptions to this rule apply in the case of certain employee awards, qualified scholarships, and de minimis fringe benefits.

     Amounts transferred to nonemployees will be includable in income if the gifts are primarily the result of a legal or moral duty or consideration for services rendered or because of an anticipated economic benefit.

     Practice Tip: A gift results from detached and disinterested generosity, given out of affection, respect, admiration, charity or like impulses. The Supreme Court held that the determination of whether something is a gift for tax purposes required consideration of the factual circumstances surrounding the transfer, in particular the transferor's intent.

     Under proposed regulations, extraordinary transfers to the natural objects of an employer's bounty will not be considered transfers to, or for the benefit of, an employee if the employee can show that the transfer was not made in recognition of the employee's employment. Thus, amounts transferred between related parties may constitute gifts if the purpose of the transfer is shown to be substantially attributed to the familial relationship of the parties and not to the circumstances of their employment.

     Example: Bob hires his son Carl to work in his business. On Carl's birthday, Bob gives him $1,500 in addition to his weekly salary. The $1,500 would be considered attributable to the familial relationship of Bob and Carl and would not be included in Carl's income.

     Payments made by an airline pilots union to pilots on strike were not gifts where the payments were made to help insure the success of the strike.

     Individuals are taxed on tip income.

(footnotes omitted) 

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