Gift cards to staff are taxable wages at any amount

When I ran restaurants, the holiday envelope was a tradition: a gift card for every cook, a cash bonus for the managers, a ham for anyone who wanted one. None of it went through payroll. Two of those three choices were wrong, including the one that looked smallest: the gift card.

The federal rules on holiday bonuses are short and mostly settled. They come from two agencies that ask different questions. The IRS asks whether the gift is wages. The Labor Department asks whether it changes the overtime you owe. A restaurant can get the first right and still owe back pay on the second. None of this is tax advice; it's the published rule as of October 2026.

Gift cards are wages at any amount

IRS Publication 15-B, the 2026 fringe benefits guide, leaves no room here. Cash equivalents such as gift certificates and gift cards, "no matter how little, are never excludable as a de minimis benefit." A $10 card is wages. So is a $500 one.

A gift card to your own restaurant is still a gift card. The regulation names gift certificates as cash equivalents, and the IRS treats the face value as the amount that goes on the W-2. It made the point in a 2004 technical advice memorandum, which isn't precedent but shows how the IRS reads the rule: an employer that used to give staff a ham, turkey or gift basket switched to a $35 grocery coupon, and the IRS ruled the coupon was taxable wages worth $35.

The tax code also closes the "it's a gift" argument. Section 102(c) says the exclusion for gifts doesn't cover anything an employer gives an employee. What you hand staff in December is compensation. You deduct it as compensation, too.

That's also why the $25 rule doesn't apply. The $25 limit in Section 274(b), described in IRS Publication 463, caps the deduction for business gifts to clients and customers. It has nothing to do with staff.

The turkey is the exception

What is tax-free is an occasional holiday gift of property with a low value. The regulation covers traditional birthday or holiday gifts of property, not cash, with a low fair market value. The Joint Committee on Taxation's explanation of the 1984 law that created the rule gave the example of "a turkey given for the year-end holidays." Pub. 15-B adds occasional staff parties to the same list.

Three limits on that:

• There's no dollar line. "Low fair market value" is decided on the facts. The IRS's own page on de minimis benefits notes that in one past ruling, "items with a value exceeding $100 could not be considered de minimis, even under unusual circumstances." That's a ceiling from one case. It isn't a safe harbor.
• Too big means all of it. If a benefit is too large to be de minimis, the same IRS page says the entire value is taxable. There's no exempt first slice.
• A voucher for one item is a gray area. That page also says a certificate for a specific low-value item, given infrequently, may be excludable. May. If you want the turkey treatment, hand over the turkey.

Shift meals work on a different rule entirely, covered in the shift meals post.

Withholding on a cash bonus: a flat 22%

A cash bonus, or a gift card, is a supplemental wage. For a bonus paid separately, or on the same check with the amount listed on its own line, IRS Publication 15 lets you withhold a flat 22% federal income tax, as long as you withheld income tax from that employee's regular wages this year or last: "no other percentage allowed" under that method. If you withheld nothing from their regular wages, you must use the aggregate method instead. The rate is 37% on supplemental wages above $1 million in the calendar year, which won't come up for a line cook. The 2025 budget law made both rates permanent.

On top of that, for 2026:

Two things people get wrong about the 22%. It's a withholding method; the employee's real liability is settled on their return. And when it's available, it's optional. You can instead add the bonus to a regular paycheck and withhold on the total under the aggregate method.

What a $500 net bonus costs you

If you tell staff "$500 for the holidays," most of them hear $500 in hand. To deliver that, you gross the bonus up so the withholding comes out of your pocket instead of theirs:

gross = net ÷ (1 − 0.22 − 0.0765 − state rate)

For an employee under the Social Security wage base, with no state income tax:

With a state that withholds a flat 5%, the gross becomes $500 ÷ 0.6535 = $765.11, and your cash cost with the matching 7.65% is about $823.64. Neither figure includes unemployment tax: for a newer or part-time hire still under the $7,000 FUTA base, add up to 0.6% of the gross, plus any state unemployment tax.

The shortcut that doesn't work is paying the employee's share of FICA yourself and calling the bonus $500. Pub. 15 says that payment is itself more wages, which is why the formula divides instead of adding.

The same math applies to a gift card. A $100 card is $100 of wages with nothing withheld from it, so the withholding has to come from cash pay. Either gross it up or tell staff in advance.

A promised bonus raises overtime

This is the part that costs restaurants money, because the shortfall doesn't show on any tax form; it's unpaid overtime.

Under the Fair Labor Standards Act, a bonus goes into the employee's regular rate, and so into their overtime, unless it fits a statutory exclusion; for a holiday bonus the two that matter are a discretionary bonus and a true gift. 29 CFR 778.211 excludes a bonus only if both the fact of paying it and the amount are at your sole discretion, decided at or near the end of the period. Its wording is blunt: "If the employer promises in advance to pay a bonus, he has abandoned his discretion with regard to it." The regulation puts most attendance bonuses, and bonuses for staying through a period, on the included side. Calling it a holiday gift doesn't change that; the regulation says labels aren't determinative.

Section 778.212 does exclude Christmas and special-occasion gifts, as long as they aren't measured by hours, production or efficiency. But a bonus "so substantial that it can be assumed that employees consider it a part of the wages" doesn't count as a gift.

The problem bonus looks harmless when you write it: "$200 to everyone who works every scheduled shift Christmas week." Here's what it does to a line cook at $15 an hour who works 45 hours that week:

That's $11.11 more owed for one cook in one week. If the bonus covers several weeks, Section 778.209 makes you spread it back across them and pay the extra half-time in every week with overtime. A $200 bonus spread over four weeks adds $50 a week; in a 45-hour week that's about $2.78 more in premium. Small per person. Across a kitchen and a season, it is back pay you owe whether or not anyone files a claim.

Tips and overtime deductions don't reach the bonus

Staff will ask whether the new federal deductions cover a holiday bonus. Mostly, no.

A bonus is never a tip. The Labor Department defines a tip as money a customer presents, in an amount the customer alone decides, and the tips deduction covers only tips received from customers or through tip sharing. Money from the employer doesn't qualify, and it can't be counted toward the tip credit either. The no-tax-on-tips post covers what does qualify.

The overtime deduction is narrower than its name. IRS Fact Sheet FS-2026-13 defines qualified overtime as overtime hours over 40, times one-half, times the FLSA regular rate. The bonus itself isn't qualified overtime. The one overlap is the example above: a nondiscretionary bonus raises the regular rate, so the extra half-time it creates, the $11.11, is part of the cook's qualified overtime. Neither deduction reduces Social Security or Medicare.

What I'm not going to give you

A dollar amount under which a holiday gift is tax-free. None exists for property, and for gift cards the answer is zero.

A way to value your own gift card at food cost. I looked for IRS authority that allows anything below face value and found none.

California's bonus rule. California has its own case law on flat-sum bonuses and the regular rate. I haven't read it closely enough to give you the math.

State supplemental withholding rates. They vary, and I didn't compile them. The 5% above is an illustration.

What to do

1. Run every gift card through payroll at face value, including cards from your own gift card program. Keep the card number, amount and issue date.
2. Give property if you want it tax-free: an occasional, low-value holiday gift such as a turkey or a ham. Not a voucher for one, and not cash.
3. Decide net or gross before you announce. If staff expect $500 in hand, budget $765.10 per person, plus any unemployment tax, in a state with no income tax.
4. Don't announce shift-based bonuses unless you're ready to pay them through the regular rate. A bonus whose fact and amount you decide only at or near the end of the period, with no promise and no yearly pattern staff count on, can stay out of overtime; one paid the same way every December may not.
5. If you did promise one, pull hours for the weeks it covers and pay the extra half-time in each overtime week.
6. List the bonus as its own line or its own check if you want the flat 22% method, and tell staff it's withholding, not their final tax.

Disclosure: I work at Katalyst, which sells a restaurant POS with its own gift card program, so card issue records are in the same place as sales. The rule that matters doesn't depend on software: whatever you hand staff in December, decide before you announce it whether it's a gift, a wage or an overtime promise.