Can You Deduct Holiday Gifts for Clients or Employees?
The holidays are such a fun time to show appreciation to the people who keep your business going… but if you’re a small business owner, you’re probably also wondering:
“Can I deduct any of this on my taxes?”
Short answer: yes, sometimes — but the rules are different for clients vs. employees, and there are some un-fun limits you’ll want to know before you hit “Checkout.”
This post walks you through the basics so you can be generous and smart.
Quick note: I’m focusing on U.S. tax rules here and keeping it general. Always check with your own tax pro for your specific situation.
Client Gifts: The Famous (and Tiny) $25 Limit
Let’s rip off the Band-Aid:
For client gifts, the IRS generally allows you to deduct only up to $25 per recipient, per year. That limit has been around since the 1960s and has never been adjusted for inflation.
So if you send a $75 gift basket to one client:
Total cost: $75
Deductible: $25
Not deductible: $50 (you can still give it — you just don’t get to deduct all of it)
What about shipping, gift wrap, and engraving?
Good news: incidental costs like gift wrapping, packaging, engraving, or shipping don’t count toward the $25 limit as long as they don’t add substantial value to the gift.
So your math might look like this:
Candle set: $22
Gift wrap + shipping: $12
Deductible gift amount: $22 (still under $25 limit)
Incidental costs: $12 (deductible as shipping/supplies, not part of the gift cap)
“But I ordered a bunch of branded mugs… does that count as a gift?”
Maybe not — and this is where it gets a little more fun.
Items that are:
Low-cost,
Have your business name/logo permanently printed, and
Are given out widely (think swag: pens, mugs, notebooks),
are often treated more like advertising/marketing rather than “gifts,” which means they can be fully deductible as advertising expenses instead of being limited to $25 per person.
That’s one reason branded items can be a smart strategy: they’re useful, visible, and potentially more deductible.
Employee Gifts: Different Rules, Different Opportunities
Now let’s talk about the people on your team.
The IRS looks at employee gifts through two main lenses:
De minimis fringe benefits (tiny, occasional perks)
Taxable compensation (wages)
1. Small, non-cash gifts (the “de minimis” category)
If you give employees a small, infrequent, non-cash gift — think a holiday gift basket, a nice box of chocolates, a logo blanket — it may qualify as a de minimis fringe benefit.
De minimis benefits are:
Low in value
Given occasionally
Not cash or cash equivalents
The IRS specifically lists holiday gifts of low value as examples of de minimis fringe benefits.
That usually means:
The gift is not taxable income to the employee, and
You get to deduct the cost as an employee benefit expense.
Is there a strict dollar threshold? The IRS doesn’t give one hard number, but guidance from tax pros and employers often treats modest, one-time gifts as de minimis — while large or frequent gifts start looking more like compensation.
If you’re thinking about something pricey (like a $500 tech gadget), that’s usually not going to be de minimis.
2. Cash, bonuses, and gift cards
Here’s the big trap:
Cash and gift cards are basically always treated as wages.
That means:
They must be included in the employee’s W-2,
You have to withhold payroll taxes, and
You can deduct them as compensation, not as a tax-free fringe benefit.
So if you want something simple and fully deductible, checks and gift cards are fine — but you’ll need to run them through payroll and treat them as bonuses.
If you want something festive and tax-friendly (and you’re okay skipping gift cards), consider non-cash items instead.
Holiday Parties: Often 100% Deductible 🎉
Thinking about hosting a holiday party for your team?
Under current rules, expenses for recreational, social, or similar activities that are primarily for the benefit of employees (like a holiday party or picnic) are generally 100% deductible, not subject to the usual 50% meals limitation.
To support that:
Invite all employees (or at least all non-highly-compensated employees),
Keep it primarily an employee appreciation event, not a client entertainment event, and
Keep good records: date, place, purpose, who was invited.
For many small businesses, a well-planned holiday party can actually be a more generous and tax-efficient option than individual gifts.
Putting It All Together: Strategy Ideas
Here are a few practical combos that tend to work well:
Option A: Client swag + employee party
Clients: Branded mugs or notebooks with your logo → treat as advertising, not gifts, in many cases.
Employees: Holiday party + small non-cash gifts (like a treat box or company-branded hoodie).
Result: High goodwill, good visibility, and potentially stronger deductions.
Option B: Tiered appreciation
Top clients: Higher-value gifts (you’ll still only deduct $25 per client, but the relationship might justify the extra spend).
Other clients: Branded, useful items (pens, notepads, coffee tumblers).
Employees: Cash or gift cards run through payroll as bonuses, plus a small non-cash gift.
Option C: Keep it simple
One nice holiday party,
One modest physical gift for each employee,
A small branded thank-you item for clients.
Sometimes simple really is better — especially in a busy Q4.
How to Track Holiday Gifts in Your Books
A few bookkeeping tips to keep future-you (and your tax pro) happy:
Use clear categories:
“Client Gifts”
“Employee Gifts”
“Employee Recreational Events / Holiday Party”
“Advertising & Promotional Items”
Separate clients and employees: Don’t lump all holiday spending into one vague “Gifts” bucket.
Add notes in the memo line: Example: “Holiday basket for ABC Construction – client gift” or “Employee holiday party – all staff invited.”
Track by recipient where possible: Especially for client gifts, so you don’t accidentally go over the $25 deductible limit per person.
When to Ask for Help
If you’re:
Unsure whether a specific gift counts as de minimis,
Debating between a gift card vs. a physical gift, or
Planning a bigger holiday event and want to be sure you’re categorizing things correctly,
it’s a great time to loop in your bookkeeper or tax professional before you hit “Order.”
If you’d like help planning how holiday gifting fits into your overall tax strategy and budget, I’m happy to help you think it through and set it up clearly in your books.
