What are the IRS guidelines and definitions of gifts to employees vs. a bonus, i.e., trips given cost-free to the employee as a reward?


The short answer is that bonuses are taxable, including free trips given as an award.

Here's the slightly longer answer. Supplemental wages to employees are taxable. Supplemental wages include bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay and retroactive pay increases, and payments for non-deductible moving expenses. Other taxable payments include non-excluded fringe benefits and expense allowances under a non-accountable plan. See IRS Publication 15, Circular E, Employer's Tax Guide.

A taxable –or non-excluded –fringe benefit is defined as a form of pay for the performance of services. But excluded fringe benefits are not taxable, and include things like health insurance, group-term life insurance coverage, employee athletic facilities, employee discounts, moving expense reimbursements, education assistance, or deminimus meals and meals on your business premises. See IRS Publication 15-B.

We are not exactly sure what you mean by "gifts," but the IRS narrowly defines "achievement awards," which are not taxable, as "an item of tangible personal property given to an employee for length of service or safety achievement, which is awarded as part of a meaningful presentation, and under conditions and circumstances that do not create a significant likelihood of disguised pay." See IRS Publication 535 for more details on achievement awards.

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