We often get asked the question “is a staff Christmas party a tax allowable expense?” The rules around social functions are followed, staff events like your end-of-year party, or your summer barbecue are tax-deductible for you, as the employer, and tax-free for your staff.
This means you can claim back some of the expenses you incur when putting on a social event for your team, while also helping to build better team bonds.
Whether your party is taking place in the office, at a local restaurant or via Zoom for your remote-working teams, you can be confident that you can recoup some of these expenses by making the relevant claim – The HM Revenue & Customs (HMRC) rules apply equally to any online staff events and remote parties.
Meeting the rules for tax-exempt staff functions
The annual function exemption means that your company can deduct costs for tax when holding an eligible annual staff social event. It also means that your employees don’t pay tax or national insurance contributions (NIC) on costs relating to these social events.
This all sounds like good news for the company bank balance, but how does the exemption actually work? And what are the specific rules that you need to know about?
- How do I know if my event is eligible? – for your event to be eligible, it must be company-wide and meet the requirements of a structured social event; i.e. where food, drink and possibly entertainment are provided. As long as all staff are covered somewhere, there can be separate functions for branches, departments, or other office locations etc.
- What records do I need to keep? – as a company, you’ll need to keep records of who was invited to the social event, and who actually attended. You’ll also need to record the costs of putting on the event, including all associated travel and accommodation.
- What’s the expenses limit per person? – there’s a limit per attendee (including partners invited as guests) of £150 including VAT. This total can be split over multiple functions – e.g. over your Christmas party, plus an Easter party and a summer event. NOTE: this can’t be disguised client entertaining. Guests must be employees or their partners and not clients or suppliers etc. Although the £150 includes VAT, the VAT in respect of employees (but not invited partners) is deductible in the same way as any other input tax on business expenses.
- What happens if this limit is exceeded? – If the total cost per person is exceeded, the costs are still deductible for the company. However, if the cost of one or more individuals exceeds the £150 p/person limit, this would be seen as a taxable benefit for the employee (including the amount for their guests.)
- How does this work in practice? – if you hold three annual functions costing £70/£60/£40 per head, your choice may be to apply the exemption to the £70 and £60 functions (Total cost of £130 per head). The balance of £20 (from the £150 limit) is lost and the £40 is taxable and NI’able. Functions covered by the £150 exemption do not have to be reported on form P11Ds.
The annual exemption is a great benefit for your company and staff. And it’s worth noting that if you’re a one-person company, that you could equally apply the benefit to taking your spouse out for a social event.
Talk to us about claiming expenses for your staff events
If you’re looking to run a staff function in the near future, talk to us. We can help you ascertain if your planned function meets the annual exemption requirements, and how you can claim back your party costs as a tax-exempt expense. As your adviser, we’ll help you draw up clear, well-explained internal guidance to make sure any staff parties don’t unintentionally fall outside of the rules and we will make sure that you are maximising your tax deductible expenses.
Get in touch, if you want to discuss this further, or if you want to arrange to cover any tax and NI for your employees through a PAYE settlement agreement or read our latest blog post Can directors and employees receive gifts from the company tax free?
Disclaimer: This post Are employee parties tax-free? contains links to products I believe to be useful to the reader, from which I may earn a small commission, but won’t cost you any extra.
FAQs
Generally, you can deduct the cost of a holiday party if it is open to all employees and their spouses, and the cost is reasonable. However, if you only invite a select group of employees, or if the cost of the party is deemed excessive, you may be limited in how much you can deduct.
How to account for company parties? ›
All employee party/function/outing/teambuilding expenses should be "posted" to an account called "Employee relations" or "100% deductible employee entertainment expenses", with the non-employee Page 2 entertainment/meals expenses posted to a separate account you title as "50% deductible entertainment expenses"-----Most ...
What is a related party for tax purposes? ›
Definition of Related Parties
The common related parties are defined as the following: Brothers and sisters. Spouses. Ancestors and lineal descendants (father, son, grandfather)
How are the employees' portions of FICA tax liabilities paid? ›
Employees do NOT pay FICA tax. The employer is responsible for paying the liability.
Are employee parties 100% deductible? ›
Employee parties thrown primarily for the benefit of non-highly compensated employees are 100% tax-deductible.
Are political parties tax-deductible? ›
General Information. Qualified political organizations, under California Revenue and Taxation Code (R&TC) Section 23701r, are considered exempt from income taxes and are not required to file California Form 3500, Exemption Application.
How to expense a company party? ›
If it is a company party, that it is a company expense. If you allocate rent, then you can allocate the same way. It is totally arbitrary how you do it, but it is entertainment and only 50% deductible on taxes. Company parties are 100% tax deductible if all employees are invited, though not all need to attend.
Are employee team-building events tax deductible? ›
Team-building outings for employees, including ticket purchases, are fully deductible. Meals provided to employees working overtime are 50% deductible. De minimis fringe benefits, such as in-office coffee and snacks, are categorized differently from meals but are also 50% deductible.
What are parties in accounting? ›
The related parties involved can include the firms or individuals who have a relationship with the reporting entity or the company preparing financial statements. Examples of related parties are subsidiary corporations, parent companies, joint venture companies, and a joint venture partner in a common third party.
Who is considered a related party in accounting? ›
The most common types of related parties are business affiliates, shareholder groups, subsidiaries, and minority-owned companies. Related-party transactions can include sales, leases, service agreements, and loan agreements. As mentioned above, these types of transactions are not necessarily illegal.
Generally, and for this purpose (disallowance of a loss), the IRS defines related parties to be [Code Section 267(b)]: The seller's immediate family: brothers or sisters (whole or half-blood), spouses, ancestors, and lineal descendants.
What is an example of a related party in accounting? ›
Related parties may enter into transactions that unrelated parties would not. For example, an entity that sells goods to its parent at cost might not sell on those terms to another customer. Also, transactions between related parties may not be made at the same amounts as between unrelated parties.
Do all employees have to pay into FICA? ›
Paying FICA taxes is mandatory for most employees and employers under the Federal Insurance Contributions Act. The funds are used to pay for both Social Security and Medicare. If you own a business, you're responsible for paying Social Security and Medicare taxes, too.
Do employees and employers pay the same amount of FICA taxes? ›
Rates and Limits
The wage base is set at $160,200 for 2023 and $168,600 for 2024. For 2023 and 2024, the total Social Security tax rate of 12.4% is split between employee and employer. The employee pays 6.2% and the employer pays the other 6.2%.
Are both the employee and the employer responsible for paying FICA taxes? ›
Social Security tax and Medicare tax, commonly referred to as FICA tax, applies to both employees and employers, each paying 7.65% of wages. An employer is generally required to withhold the household employee's share of FICA tax from wages.
Can you write off alcohol for a company party? ›
How do I write off alcohol as a deduction in 2023? If you're looking to write off any business meals (that can include alcohol), you'll need to report it on Schedule C and attach it to the standard Form 1040 when you file your tax return.
Are birthday gifts to employees tax-deductible? ›
As a general rule, the IRS considers employee holiday gifts “de minimis benefits,” as long as those gifts aren't too lavish. That means your employees don't have to pay federal income taxes on their gifts, and you can deduct the value of those gifts as non-wage business expenses on your federal taxes.
Are employee meals deductible? ›
You generally can't deduct meal expenses unless you (or your employee) are present at the furnishing of the food or beverages and such expense is not lavish or extravagant under the circ*mstances.
Are employee golf outings tax-deductible? ›
The IRS says that the following types of entertainment qualify for the 100 percent employee entertainment tax deduction: Holiday parties, annual picnics, and summer outings. Maintaining a swimming pool, baseball diamond, bowling alley, or golf course.
