When a company gifts merchandise to employees, these gifts can generally be considered as employee fringe benefits. The value of these gifts should be included in the employee's gross income and will be subject to withholding and employment taxes, as they are considered taxable compensation. If the gifts are considered de minimis (of minimal value), they may be excluded from the employee's taxable income. For the company, the cost of the merchandise gifted to employees can be treated as a business expense. You can deduct this expense on your tax return, typically under the "Compensation of Officers" or "Salaries and Wages" category, depending on your business tax form. It's essential to maintain proper documentation of the gifts and their costs for tax record purposes. Keep in mind the IRS may have specific rules and exceptions for certain types of employee gifts, so it's best to ensure you comply with the latest tax laws when handling employee gifts for tax purposes.