Daycare Tax Tips

Giving Gifts to Employees

Must cash gifts be treated as taxable?

A household employer writes:

>I LOVE your website. But I have a question for you that is about a household employee rather than a family child care business. I am hoping you can provide guidance anyway. My husband and I want to give our long time childcare provider a gift of money, but our accountant says that she (our employee) has to pay taxes on that money, just as she does on her wages. Which means I can hand a stranger $13,000 a year with no tax liability to him, but I can't give it to a beloved friend, who happens to take care of our disabled son??? Is there any way to "gift" her money?? Please advise!

Your accountant is correct. When employees receive cash gifts or bonuses the income is taxable to them. Such payments are treated as part of their wages.

Similarly, child care providers and other business owners must treat any cash gifts received from customers as additional business income. Even gift cards are considered taxable income.

There are a lot of rules around employee compensation. Otherwise certain employers would use any loophole to get out of paying the employment taxes. I think the only tax-free gift on the books (from a long time ago) is a Thanksgiving or Christmas turkey! Those can be handed out tax free.

If your employee is a relative or a friend from before she started caring for your child, there might be some leeway here. Still, I would expect the IRS to argue that any cash payment is a taxable holiday bonus.

You are very nice to be thinking of your child care provider. Hopefully, this information won't stop you from offering the cash gift. I'm sure she will appreciate it!

Last updated 29 November 2011

Posted on 2011-11-30 00:49:48