Can a Business Gift Money to an Individual? Deductions and Tax Rules

Yes, a business can gift money to an individual, but the federal tax rules are far less generous than the word “gift” suggests. The company’s deduction is capped at $25 per recipient per year, any payment to an employee is treated as taxable wages regardless of intent, and the business owners themselves — not the entity — may owe gift tax on larger amounts. How the transfer is structured matters as much as why it is made.

When a Payment Actually Qualifies as a Gift

The IRS distinguishes sharply between genuine gifts and disguised payments for services. The Supreme Court set the test in Commissioner v. Duberstein, holding that a gift must come from “detached and disinterested generosity” or from “affection, respect, admiration, charity or like impulses,” and that the transferor’s intention is the most critical factor.¹ A payment that looks like a thank-you for past work or an incentive for future work fails this test whatever the business calls it.

When a transfer does qualify, the recipient can exclude it from gross income under IRC Section 102.² That exclusion disappears the moment the IRS identifies a business motive. Patterns that draw scrutiny include payments that follow completed work, go to someone with a business relationship, or scale with the value of services provided.

If the IRS reclassifies a “gift” as compensation and the recipient failed to report it as income, an accuracy-related penalty of 20% of the underpayment applies, rising to 40% for gross valuation misstatements.³

The $25 Deduction Cap

Even a legitimate business gift produces a very small deduction. IRC Section 274(b) limits the deduction to $25 per recipient per taxable year, covering the total value of everything given to that person, whether cash, merchandise, or anything else.⁴ The cap has not been adjusted for inflation since 1962. A business can give a gift worth far more than $25, but the deduction stays frozen at that amount.

Two narrow exclusions from the cap exist. Incidental costs like gift wrapping and shipping do not count against the $25 as long as they do not meaningfully increase the gift’s value. Promotional items costing less than $4 that bear the company’s name are also excluded.⁴

Gifts to Employees Are Always Taxable Wages

This is where businesses most often go wrong. IRC Section 102(c) flatly prohibits excluding any amount transferred by an employer to an employee as a gift.² Genuine generosity, a birthday, a holiday, personal hardship — none of it changes the answer. The money is taxable wages.

Cash and gift cards are never de minimis fringe benefits. The IRS states plainly that “cash or cash equivalent items provided by the employer are never excludable from income.”⁵ Employers must report cash gifts and gift cards on the employee’s Form W-2 and withhold federal income tax, Social Security, and Medicare.

Non-cash items of small value can qualify as de minimis fringe benefits and avoid taxation. A holiday turkey or occasional event tickets fit. Anything with a face value or that is easily converted to cash does not.⁶

Gift Tax Falls on the Owners, Not the Business

Only individuals file gift tax returns. When a corporation, partnership, or LLC makes a gift, the IRS treats the individual shareholders, partners, or members as the actual donors.⁷ The entity itself owes no gift tax. The obligation flows through to the owners.

For 2026, the annual gift tax exclusion is $19,000 per recipient.⁸ Each owner’s share of the gift counts against that owner’s own annual exclusion. If a business with two equal partners gives $30,000 to an individual, each partner is treated as having given $15,000, which falls under the $19,000 threshold and requires no gift tax return. If the same business gives $50,000, each partner’s $25,000 share exceeds the exclusion, and both partners must file Form 709.

Amounts above the annual exclusion reduce the lifetime exemption, which the One, Big, Beautiful Bill set at $15,000,000 for 2026.⁹ Most owners will not owe actual gift tax until lifetime gifts exceed $15 million, but filing Form 709 to report amounts above the annual exclusion is still mandatory even when no tax is due.

Constructive Dividend Risk for Corporations

When a C corporation gives money to someone who is not a shareholder, the IRS may treat the transaction as two events: a constructive distribution to the shareholder who directed the gift, and then a personal gift from that shareholder to the recipient. The IRS treats various transactions that move corporate funds to or for the benefit of shareholders as constructive distributions to the extent of the corporation’s current or accumulated earnings and profits.¹⁰

The practical result is double taxation. The corporation cannot deduct the gift beyond $25, the shareholder owes tax on a deemed dividend, and the shareholder may also face gift tax reporting on the same amount. The risk is highest when a controlling shareholder directs a corporate gift to a friend or family member, because the IRS will look past the corporate form and treat the transfer as the shareholder’s personal generosity funded with corporate money. S corporations and partnerships face a similar dynamic, though the mechanics differ because income already passes through to owners.

One Clean Way to Give Money Tax-Free: Disaster and Hardship Payments

IRC Section 139 carves out a real exception. A business can make payments to individuals affected by a qualified disaster, and those payments are excluded from the recipient’s gross income when they cover reasonable personal, family, living, or funeral expenses caused by the disaster, or the repair of a personal residence and its contents.¹¹

A “qualified disaster” includes federally declared disasters, events resulting from terrorism, and certain catastrophic events determined by the Treasury Secretary.¹¹ Payments are tax-free only to the extent the expenses are not already covered by insurance. The provision applies to payments made to both employees and non-employees, making it one of the few routes for giving money to a worker without triggering wage treatment. Businesses that want a formal hardship program can set one up under Section 139, though the structure typically needs professional guidance.

Documentation and Reporting

For payments to non-employees that qualify as true gifts under Section 102, there is no 1099 filing requirement because the money is not income to the recipient. The risk sits exactly on that line: if the IRS later reclassifies the payment as compensation, the business can face penalties for missing information returns.

A prudent step is to collect a completed Form W-9 from any non-employee receiving a substantial payment, regardless of how the business characterizes it.¹² Having the recipient’s taxpayer identification number on file makes it possible to issue a corrected 1099 quickly if the classification is challenged. For anything where the recipient provided services, referrals, or other value, filing Form 1099-NEC or Form 1099-MISC is the safer choice.

Starting with 2026 tax year returns, the filing threshold for Form 1099-MISC and Form 1099-NEC rises from $600 to $2,000, and the threshold will adjust for inflation beginning in 2027.¹³ The higher threshold reduces paperwork on smaller payments but does not change the underlying question of whether a payment is a gift or compensation. Any required 1099 must be furnished to the recipient by January 31 following the year of payment, and late or incorrect filings carry escalating penalties.¹⁴

1
Justia U.S. Supreme Court Center. Commissioner v. Duberstein, 363 U.S. 278 (1960)
2
Office of the Law Revision Counsel. 26 U.S.C. 102 – Gifts and Inheritances
3
Office of the Law Revision Counsel. 26 U.S.C. 6662 – Imposition of Accuracy-Related Penalty on Underpayments
4
Office of the Law Revision Counsel. 26 U.S.C. 274 – Disallowance of Certain Entertainment, Etc., Expenses
5
Internal Revenue Service. De Minimis Fringe Benefits
6
Internal Revenue Service. Publication 15-A (2026), Employer’s Supplemental Tax Guide
7
Internal Revenue Service. Instructions for Form 709 (2025)
8
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
9
Internal Revenue Service. What’s New – Estate and Gift Tax
10
Internal Revenue Service. Corporations
11
Office of the Law Revision Counsel. 26 U.S.C. 139 – Disaster Relief Payments
12
Internal Revenue Service. About Form W-9, Request for Taxpayer Identification Number and Certification
13
IRS.gov. Publication 1099 General Instructions for Certain Information Returns
14
Internal Revenue Service. Information Return Penalties