I have often been approached by prospective clients confused by the federal tax regulations concerning employee awards. Most of these people end up working with their accounting department and legal department to determine the applicable taxation of employee awards. Taking advantage of tax regulations requires some research but I hope to provide a starting point that will ensure award program recipients have a rewarding experience.
Although some tax guidelines for employee awards may be confusing at times, one factor is clear cut-cash bonuses and gift cards are considered compensation/subject to income tax. A recent article on employee awards and taxing information also revealed that many times cash gifts and bonuses are received with mixed feelings. According to the author, “Some employees are put off by the perceived lack of thought that goes into a cash gift, others are disappointed by the amount. Employees who received their cash gift or bonus in the form of a contribution to ordinary payroll were most disappointed.”
However, tangible employee incentives that allow an employee to select a merchandise award are not subject to the same strict guidelines as cash bonuses and gift cards. In 1986 the U.S. Congress and President passed the Tax Reform Act which affected the taxation of safety and service related awards. In order for a corporate gift to be excludable from employee income taxes, they must meet the following criteria.
Award program must fall into a qualified plan.
A qualified plan involves an award program that is designed to incorporate the everyday workers within an organization. Management, administration, clerical or professional employees do not qualify for income tax exemptions.
Awards must be an item of tangible personal property.
Employee awards are items given as part of a meaningful presentation-they are earned. Company celebrations, birthday gifts, travel/food/event tickets, etc do not qualify as a tangible gift as part of this concept.
Award budget must fall under an average award cost of $400 to $1600 per person.
In order to ensure employees cannot earn gifts totaling more than this limit, many of my clients will cap off their award budget per employee. With modern employee award programming, reporting and sticking to a budget is a straightforward process. For service awards, many of my clients will take the annual anniversary list and set a budget for the year to fit this guideline each year. For safety incentive programs, a few of my clients will not allow points to accrue for more than a year so that budgets are consistent with invoicing.
Service awards may be given every five years beginning at five years of service.
Giving service awards for milestone anniversaries has been commonplace in organizations since the Reform act was passed due to this regulation. I have had a few clients recently that decided to award 1 year anniversary recipients. They are able to use the de minimis fringe benefit exception of the tax regulations to award a low fair market value employee award to recognize one year recipients. I think this is becoming more popular as service awards help a company to retain employees.
Although designing a program to meet these requirements takes more time, the tax benefits will help to reduce the time it takes to process payroll and prevents employees from being taxed on a free gift. Instead of giving a corporate gift with strings attached, service and safety awards are great alternatives without the tax consequences.