Holiday Gifts for Clients and Employees: The IRS $25 Limit and Other Tax Rules
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How we wrote this: A summary of IRS Publication 463 (gifts chapter) and Publication 15-B (2026) on de minimis fringe benefits, both linked below and checked October 29, 2026. This is general information, not tax advice. A tax professional can apply it to your situation.
Year-end is when many small businesses send gift baskets to clients and hand out something small to staff. The tax rules for the two groups are different, and the client rule is stricter than most people expect.
Gifts to clients and customers: $25 per person per year
IRS Publication 463 is direct: "You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year."
What that means in practice:
- It's per recipient, per year. A $100 gift to one client is still a $25 deduction.
- Gifts to a company can count as gifts to people. If a gift to a company is meant for the personal use of particular people, the IRS treats it as an indirect gift to those people.
- Family members count too. A gift to a customer's family member is generally treated as an indirect gift to the customer, unless you have your own independent business connection with that person.
- Spouses are one taxpayer. If you and your spouse both give gifts, you're treated as one taxpayer for the limit, even with separate businesses. A partnership and its partners are also treated as one.
The publication's own example: three $80 gift baskets ($240) taken home by three executives of a customer give a total deduction of $75 ($25 × 3).
What doesn't count toward the $25
- Incidental costs such as engraving, packaging, insurance and mailing generally aren't part of the gift's cost, as long as they don't add substantial value. Gift wrap is incidental; an ornamental basket worth a lot compared with the fruit inside isn't.
- Items costing $4 or less that have your name clearly and permanently imprinted and are one of many identical items you widely distribute, like pens or desk sets.
- Signs, display racks and other promotional material used on the recipient's business premises.
Gift or entertainment?
Pub. 463 says an item that could be either is generally treated as entertainment, which is a separate category: Pub. 463 says you generally can't deduct any expense for an entertainment event. One clear exception: packaged food or drinks that you give a customer to use later are treated as a gift.
Gifts to employees: what's taxable
Gifts to your own employees aren't covered by the $25 client rule. They fall under the fringe benefit rules in IRS Publication 15-B (2026).
The key line: cash and cash equivalents are never excludable. Pub. 15-B lists gift certificates, gift cards and the use of a charge or credit card as cash equivalents and says they're never excludable as a de minimis benefit, "no matter how little." So a $25 gift card to an employee is wages, subject to payroll taxes like any other pay.
What can be excluded from wages as a de minimis benefit, per Pub. 15-B:
- Holiday or birthday gifts, other than cash, with a low fair market value
- Flowers, fruit or similar items given on special occasions such as illness or outstanding performance
- Occasional parties or picnics for employees and their guests
- Occasional tickets to a theater or sporting event
Season tickets don't qualify, and if a benefit isn't de minimis, generally the entire value is included in the employee's income.
The holiday party
Pub. 15-B says food and drink for employee recreation, such as holiday parties or annual picnics, remain 100% deductible when made primarily for the benefit of employees other than officers, owners of 10% or more, and other highly compensated employees.
Keep simple records
Pub. 463's recordkeeping table lists what to record for each gift: its cost, date and description, its business purpose, and your business relationship to the recipient. You don't always need each recipient's name: a general description works if it's clear you aren't trying to get around the $25 limit, such as handing out one or two event tickets each to many customers.
Our guide on how long to keep business records covers retention.
Quick checklist
- Client gifts: budget with the $25-per-person deduction in mind
- Don't count wrapping or shipping toward the $25 if they don't add real value
- Employees: give non-cash items of low value, or run gift cards through payroll
- Keep receipts and a list of who received what and why
Related guides
- Estimated quarterly taxes for the self-employed
- The $2,500 de minimis safe harbor, a different "de minimis" rule for equipment purchases