tax experts- giftcards as incentives

[Sagginit]

so first off yes i have consulted my company but need to wait to meet with someone for a clear answer and would like to go in there knowing what i am talking about in case they try to trick me into believing its not what i think it may be. so the scenario is i was given giftcards as an incentive and told they were paying all taxes and taking care of all that, we would pay nothing. i know it may seem to good to be true but we get other taxable incentives and they said this would be different how it was processed.

someone discovered this when their w2s did not match their last paystub and was told by payroll it was because of these giftcards which just did not seem right to us. i just researched it and it says according to the govt. giftcards are cash and taxable so now I am not sure how they could be gifting them to us without us paying taxes as they claimed.

so here is my question, is this actually increasing my yearly gross income without me being aware of it if they are filing these under my name and paying the taxes on my behalf? the second part is, they are calculating taxes it looks like off a higher gross amount than what my bonus giftcard was, i read that this can be done by an employer to ensure you get the full amount. does this then mean my gross income is being inflated by them?

this is so budget board b/c i did my taxes. i then went in today and found these hidden in there and am now concerned that i will have to file an amendment and it may affect the refund i just got.

 

[Cheshire Figment]

It gets complicated, but what they do is called a "gross-up".

This example uses semi-random numbers they will give you a Gift Card of $25. On the pay stub for the period where they give you the card, they will show $35 as gross income (but not as salary), $25 as the gift card and $10 as withholding. So on the W-2 at the end of the year it will actually show $35 more than your salary and $10 more than the withholding you were used to. Basically they are assuming that the $25 plus the additional $10 reported will increase your total tax by $10, and then the additional $10 in reported withholding will cover it.

The computations are actually much more complicated than what I have said above, and I totally disregarded any state income tax in my example.

Believe it or not, this is the simplified answer.

Mike (CPA Retired)

 

[minnie1928]

This is totally correct, just as Cheshire explained it above.

 

[Sagginit]

thanks for the quick answer! so in a nutshell we were told this wouldn't be taxed like other bonus giftcards we get. so i am correct to assume they did not tell the truth (or the left hand did not know what the right payroll hand needed to do) and this actually is reported income and this increases my yearly gross income?

the deal is the giftcards can only be used at our company's retail stores. as discussed with a co-worker today when we started to put the pieces of the puzzle together if this is being grossed up without our knowledge and pushing up what the government sees as our income it may not be worth taking these cards from them.

 

[minnie1928]

the deal is the giftcards can only be used at our company's retail stores. as discussed with a co-worker today when we started to put the pieces of the puzzle together if this is being grossed up without our knowledge and pushing up what the government sees as our income it may not be worth taking these cards from them.

But, no matter how you slice it...you still paid less tax than the value of the gift card. In the example above, you paid $10 in tax for a $35 gift card leaving you with a net of $25.

Think of it another way, would you turn down a $35 bonus if you knew taxes were going to be withdrawn? It's really the same principle.

 

[snarlingcoyote]

thanks for the quick answer! so in a nutshell we were told this wouldn't be taxed like other bonus giftcards we get. so i am correct to assume they did not tell the truth (or the left hand did not know what the right payroll hand needed to do) and this actually is reported income and this increases my yearly gross income?

the deal is the giftcards can only be used at our company's retail stores. as discussed with a co-worker today when we started to put the pieces of the puzzle together if this is being grossed up without our knowledge and pushing up what the government sees as our income it may not be worth taking these cards from them.

It is reported as income, but in a gross-up, the amount extra of the income that was taxed is already paid, even if the extra puts you in a new tax bracket on your own pay (spouse pay is not considered). Essentially, your income will be your salary plus the gift card, plus the money that was spent to pay taxes, plus the taxes on the money that was spent to pay taxes.

If you move on the company dime, you will get a gross-up document detailing payments, taxes, tax-exempt expenses etc, how much was paid in taxes, how much money on the money that was paid to you for taxes was paid for those taxes. . .it's great fun at tax time.