Today TaxMama hears from Terry in Arkansas who’s angry.
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“Last week my employer offered a prize of gasoline coupons to employees who would fill out the annual employee opinion survey.
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I won. I received coupons redeemable for $50.00 of gasoline at the highest priced station in town, WITH a note congratulating me and informing me that the taxes would be withheld from my next paycheck. Is it legal to withhold tax on ‘’prizes’’ that are non-cash but have cash value when the recipient has no say over what the prize is spent on?”
Dear Terry,
Well, first of all, congratulations on the prize.
And I can see why you’d be angry about your boss giving you something with one hand and taking it away with the other.
Here’s what IRS says about holiday gifts you receive from your employer: Extrapolate this information to apply to all employer ‘gifts’.
https://www.irs.gov/publications/p525/ar02.html#d0e1023
Holiday gifts. If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, do not include the value of the gift in your income.
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However, if your employer gives you cash, a gift certificate, or a similar item that you easily can exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved.
There’s a further discussion in an IRS report (circa 2004) that explores the taxability of things like gift certificates and gift cards. IRS considers them “cash equivalents” and instructs employers to add the value to wages.
https://www.irs.gov/pub/irs-tege/p_4090_fed_0305_text.pdf
So not only is it legal for your employer to withhold taxes on the prize, it’s mandatory.
You can always return the prize and not have anything withheld from your check.
Or you can go to the most expensive station in town, and use the gift card. You’re still getting more money for the gasoline than you had before you got the card.
And remember, you can find answers to all kinds of questions about gasoline prizes and other tax issues, free. Where? Where else? At TaxMama.com
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- IRS Publication 525 Chapter 2 :: Taxable and Non Taxable income
- IRS Advice :: Taxability of Gift Cards
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