You’re standing at the checkout of a big-box retailer, staring at a wall of plastic. You’ve got a dozen employees who worked their tails off this quarter, and you want to say thanks. Or maybe you've got a client who just referred a massive contract your way. It seems easy. Grab a few $50 chunks of plastic, hand them out, and call it a day. But here’s the thing: gift cards for business owners are a minefield of IRS headaches and missed marketing opportunities if you don’t know the rules.
Most people think of gift cards as "cash-lite." They aren't. In the eyes of the taxman, they basically are cash.
I’ve seen entrepreneurs get absolutely hammered during audits because they treated gift cards like "de minimis" fringe benefits. They aren't. If you give an employee a $25 Starbucks card, the IRS treats that exactly the same as if you handed them a $20 bill and a five. It’s taxable income. Period. No exceptions. It’s kinda wild how many people miss this, but failing to report those cards on a W-2 is one of the fastest ways to trigger a red flag with the agency.
The IRS reality check on gift cards for business owners
Let's get into the weeds for a second because this matters for your bottom line. Under IRS Publication 15-B, "de minimis" benefits are small items like a holiday turkey, a box of chocolates, or an occasional meal. These are non-taxable because the value is so small it’s unreasonable to account for it. However, the IRS is incredibly clear: cash and "cash equivalent" items—which include gift cards—are never de minimis.
It doesn't matter if it’s only $5.
If it’s a gift card that can be used like cash at a specific store or across multiple retailers (like a Visa or Amex gift card), it must be included in the employee’s gross income. You have to withhold federal income tax, Social Security, and Medicare taxes. If you’re a business owner trying to be "the cool boss" by handing out $100 cards under the table, you’re actually creating a tax liability for both yourself and your staff.
Is it annoying? Absolutely. Is it avoidable? Sorta, if you switch to tangible gifts, but then you lose the flexibility that makes gift cards so popular in the first place.
The Client Side of the Equation
Now, gifting to clients or prospects is a whole different ballgame. If you’re using gift cards for business owners to drum up new leads or thank a referral source, you’re looking at a $25 limit.
Yep. Twenty-five bucks.
Section 274(b) of the Internal Revenue Code has capped the deduction for business gifts at $25 per person, per year, since the 1960s. Think about that. In 1962, $25 was worth about $250 in today's money. The law hasn't caught up with inflation, yet we're still stuck with it. If you send a $100 Amazon card to a vendor, you can only deduct $25 of that. The rest is essentially a personal expense coming out of your pocket.
👉 See also: Share Market Today Closed: Why the Benchmarks Slipped and What You Should Do Now
Why you should stop buying generic cards
Most business owners default to Amazon or Starbucks. It's safe. It's easy. It’s also incredibly boring and does nothing for your brand.
If you want to use gift cards as a growth lever, you have to think bigger than just a "thank you" note. Real growth happens when you use gift cards to drive specific behaviors. For example, a "refer-a-friend" program powered by gift cards can lower your Customer Acquisition Cost (CAC) significantly compared to Facebook ads.
According to research from the Incentive Research Foundation, non-cash rewards (which include specific-merchant gift cards) are often more effective at driving long-term performance than straight cash bonuses. Why? Because people tend to spend cash on bills or groceries. They forget where it came from. But if you give someone a gift card to a high-end steakhouse, they remember the experience you gave them. They associate your business with that feeling of luxury.
Branded gift cards: Your own mini-economy
If you run a service-based business or a retail shop, you shouldn't be giving away other people's gift cards. You should be selling and gifting your own.
This is essentially an interest-free loan from your customers. When someone buys a $100 gift card from your store, they are giving you $100 today for services you might not provide for six months. In the world of cash flow management, that's huge. Plus, there's the "breakage" factor. Roughly 10% to 20% of gift cards are never redeemed. While the laws on "escheatment" (what happens to unclaimed property) vary by state—especially in places like Delaware or New York—you often get to keep a portion of that unused value after a certain period.
The psychology of the "Bonus" card
Have you ever seen those deals where you buy a $100 gift card and get a $20 "bonus" card for free?
Business owners use this because it works like a charm. But there’s a psychological trick here. Often, the $20 bonus card has an expiration date, while the $100 card doesn't (thanks to the CARD Act of 2009). This creates urgency. It brings the customer back into your shop during the slow months of January and February.
It’s not just about the sale. It’s about the foot traffic.
If you can get a customer through the door one extra time, the chances of them becoming a "lifer" go up exponentially. You aren't losing $20. You're paying $20 in margin to buy a repeat visit. In the long run, that's a steal.
✨ Don't miss: Where Did Dow Close Today: Why the Market is Stalling Near 50,000
A warning on "The Visa Trap"
Many business owners love the prepaid Visa or Mastercard options. They're flexible. Everyone likes them. But they are the most prone to fraud.
Professional scammers spend their days in the gift card aisles of pharmacies, skimming numbers off the back of these cards before they’re even purchased. They put a sticker back over the PIN and wait for someone to activate the card at the register. The second you load $200 onto that card for your top salesperson, the scammer’s bot drains it.
If you're buying cards in bulk, go through a reputable B2B provider like Blackhawk Network or InComm, or buy digital cards directly from the source. Steer clear of the rack at the grocery store if you’re buying for a whole team. It’s just not worth the risk of handing an employee a dead piece of plastic.
Logistics: Managing the mountain of plastic
If you’re managing gift cards for business owners on a larger scale—say, for a company with 50+ employees—spreadsheets are your enemy. You will lose track. You will forget to report them to payroll.
You need a centralized system. Platforms like Rybbon (now part of Blackhawk) or Tango Card integrate directly with your CRM or HR software. This does two things:
- It automates the delivery (no more licking envelopes).
- It creates a digital paper trail for your accountant.
When the auditor knocks, you don't want to be digging through a desk drawer for receipts. You want a CSV file that shows exactly who got what, when they got it, and why.
Nuance in the "Gift" vs. "Award"
There is a narrow exception for "length-of-service" or "safety" awards. If an employee has been with you for five years, you can give them a tangible gift (not a gift card!) up to $400 in value and deduct it without it being taxable income for them.
But again, the keyword is tangible. A watch? Fine. A gold-plated stapler? Sure. A $400 Amazon gift card? Nope. That’s back in the taxable bucket.
It’s honestly a bit ridiculous how granular these rules get. You’d think the government would want to encourage small business owners to be generous, but the current framework really pushes you toward a very specific type of record-keeping.
🔗 Read more: Reading a Crude Oil Barrel Price Chart Without Losing Your Mind
Actionable steps for your gift card strategy
Stop winging it. If you want to use gift cards effectively without getting burned, here is exactly how you should structure it starting Monday.
First, audit your current "hidden" spending. Go through your credit card statements and find every time you bought a gift card for an employee or client. Total it up. If you haven't been reporting these to your payroll provider, talk to your CPA immediately about a "catch-up" adjustment. It's better to fix it now than during an audit.
Second, switch to digital-first. Physical cards are a liability. They get lost in the mail, they get stolen, and they’re hard to track. Digital cards sent via email provide an instant digital receipt and "proof of receipt" that is invaluable.
Third, create a "Gift Card Policy" document. It doesn't have to be long. Just a one-pager that says:
- Who is authorized to buy cards.
- The maximum value allowed per recipient.
- The requirement to submit a "Business Purpose" note for every purchase.
Fourth, rethink your client gifts. Instead of one $100 card that you can only partially deduct, consider four $25 touches throughout the year. Or, better yet, spend that money on a "tangible" gift that isn't subject to the same strict cash-equivalent rules, like a high-quality piece of equipment or a curated gift basket where the "gift" part is the physical item, not a voucher for one.
Fifth, look into your state’s unclaimed property laws. If you are issuing your own branded gift cards, you need to know when that money technically stops being yours. Some states are very aggressive about claiming "abandoned" gift card balances after 3 to 5 years. Don't let a surprise bill from the state controller ruin your quarter.
Business ownership is often just a long series of learning things the hard way. Gift cards seem like a small detail, but they're a perfect example of how "simple" tasks have deep layers of tax and legal complexity. Handle the reporting on the backend so you can focus on the fun part: actually rewarding the people who make your business run.
Next Steps for Implementation:
- Review IRS Publication 15-B (Employer’s Tax Guide to Fringe Benefits) specifically the section on "De Minimis Benefits."
- Transition your employee recognition program to a digital platform that syncs with your payroll software.
- Verify with your CPA that your client gifting strategy doesn't exceed the $25 deductible limit per person.