The Smart Way to Handle Holiday Gift Cards in Your Books
Holiday season is the perfect time to thank customers, reward employees, or boost sales with gift cards. But gift cards come with bookkeeping rules that many small business owners overlook.
Handle them correctly and everything flows smoothly into tax season.
Handle them incorrectly and you could misstate income, confuse your accountant, or even overpay on taxes.
Here’s the simple, clear way to record holiday gift cards so your books stay accurate and tax-ready.
Why Gift Cards Matter for Your Books
Gift cards feel simple on the surface, but from an accounting standpoint they’re unique.
A gift card is not income the moment someone buys it. It’s a liability until it’s redeemed.
That matters because your financial reports need to show what you still owe customers and what can be recognized as revenue.
During the holidays, when gift card volume increases, getting this right becomes even more important.
How to Record Gift Cards Your Business Sells
If you sell gift cards to customers, treat the transaction as unearned revenue.
Here’s the process:
1. Record the sale as a liability
The gift card is a promise to provide a product or service later.
Until you deliver that, it isn’t revenue.
Create an account called something like “Gift Card Liability” or “Unearned Revenue.”
When someone buys a card:
Increase the liability
Increase cash or bank balance
2. Record revenue when the gift card is redeemed
Once the customer uses the card, you reduce the liability and increase revenue.
This keeps your income accurate and prevents overstating your sales for the year.
3. What about unused gift cards?
If gift cards are never redeemed, a common occurrence, many states allow you to recognize that amount as income after a certain period.
Your accountant can help with state-specific escheatment rules.
How to Record Gift Cards You Give to Employees
Employee gifts and bonuses have different rules than customer promotions.
1. Cash equivalents are taxable
Gift cards function like cash.
If you give a gift card to a W-2 employee, it is taxable income and must be added to payroll.
Examples:
A $50 Target gift card
A $100 Visa gift card
These must be included in the employee’s W-2.
2. Most gift cards cannot be treated as de minimis benefits
De minimis fringe benefits are small, infrequent gifts like snacks or occasional holiday treats.
Gift cards almost never qualify because they have a clear cash value.
So even if the amount is small, if an employee receives a gift card, it needs to go through payroll.
How to Record Gift Cards You Give to Clients or Vendors
Client gifts have their own tax rules.
1. The IRS limits deductions for client gifts
You can deduct up to $25 per person per year for client gifts.
If you give a $50 gift card, only $25 is deductible.
2. Record client gift cards as a business expense
Categorize them under “Business Gifts” or “Client Gifts.”
They do not require payroll treatment because they are not for employees.
3. Keep clear notes
Record who received the gift and the business purpose.
Your accountant will thank you later.
How Holiday Gift Cards Affect Your Taxes
Gift cards change your books in three ways:
Revenue may be delayed until redemption.
Employee gift cards increase payroll tax obligations.
Client gift cards may be deductible only up to $25.
Handling these details correctly keeps your books clean and your tax bill accurate.
Holiday Season Tip: Set Up a Gift Card Workflow
To avoid confusion, create a simple process for recording gift cards:
A separate liability account for cards sold
A category for client gift expenses
A workflow for adding employee gift cards into payroll
Notes or receipts saved in your bookkeeping system
This keeps year-end reporting smooth and prevents missed or misstated transactions.
Final Thoughts
Gift cards are a great way to increase sales, boost morale, and strengthen customer relationships during the holidays. They also come with specific bookkeeping rules that can impact your financials if handled incorrectly.
If you’re unsure how to categorize holiday gifts, handle liabilities, or clean up year-end reports, that’s exactly what we help with.
Red Leaf Bookkeeping keeps your books accurate, tax-ready, and stress-free, all year long.
👉 Book a free Money Clarity Call and get your holiday bookkeeping handled the right way.