As the workplace Christmas season approaches, many employers begin planning office Christmas parties, handing out company holiday party gifts and distributing holiday gift cards for employees. While these traditions boost morale, they also create real compliance considerations around employee pay, taxable benefits and reporting requirements.
To help employers navigate these issues confidently, we asked Jo McClure, Director of Payroll Administration at Axcet HR Solutions, to answer the most common questions about holiday pay and taxes during the employee Christmas party season.
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Do we have to pay hourly employees to attend the party if it's after hours? And do we have to compensate nonexempt employees who stay late to help?
A key consideration when planning office Christmas parties is understanding when time must be paid. Generally speaking, wage and hour regulations do not require you to compensate nonexempt employees to attend an after-hours holiday gathering, as long as:
Attendance is truly voluntary, and
Employees face no negative consequences for choosing not to attend
If the choice to attend or not attend is strictly up to the employee, make that clear in writing to relieve any pay obligation. Exempt employees do not need to be paid beyond their salaries for time spent at the event.
If your office Christmas party overlaps the regular workday, you must compensate nonexempt employees for the part of the event that falls within their normal schedule.
If attendance is required—or if employees believe they would suffer some adverse consequence for missing the event—then all time spent at the party should be considered paid time and may count toward overtime.
If employees set up or clean up before or after the party, that time must be treated as hours worked. Even if employees volunteer to stay late, that time is compensable at the regular rate of pay, including any overtime that may apply.
Do holiday gift cards for employees need to be taxed?
Yes. When you hand out holiday gift cards for employees—whether as company holiday party gifts, office holiday party gifts or part of an employee Christmas party—the value is always considered taxable wages.
Gift card value, as of the date provided, is:
subject to federal income tax withholding
subject to Social Security and Medicare (FICA) taxes
subject to FUTA
included in Form W-2 wages
Many employers mistakenly assume that small-dollar gift cards qualify as a de minimis fringe benefit. The IRS makes it clear that cash and cash-equivalent fringe benefits—including gift cards and prepaid cards—are never excludable from income, no matter how small.
Refer to the IRS Employer’s Tax Guide to Fringe Benefits for more information.
Other holiday gifts may qualify as de minimis if they are low in value, occasional and impractical to track—for example:
holiday ham or turkey voucher
one-time tickets to a sporting event or show
a small gift basket
Examples that are not excludable include:
gift cards
prepaid Visa cards
gift certificates usable for general merchandise or groceries
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To keep workplace Christmas celebrations compliant:
Define whether party attendance is voluntary
Pay for overlapping work hours
Count setup and cleanup as worked time
Track and tax holiday gift cards
Coordinate with payroll for accurate wage reporting
Review W-2 impacts before year-end
Holiday parties and gift-giving strengthen culture—but they can also create unexpected payroll and tax liabilities if not handled correctly. From compensating employees for attending office Christmas parties to correctly taxing holiday gift cards for employees, employers must take extra care as December approaches.
Axcet HR Solutions helps small and mid-sized businesses manage payroll, tax reporting and year-end compliance, so your celebrations remain festive—and fully compliant. Learn more about Axcet's payroll compliance services >>
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