Are Employee Achievement Awards Taxable or Not?
Employees need to feel valued and appreciated by employers. When you give your employees achievement awards, celebrating specific milestones in safety or length of service, you’re recognizing their efforts, which, in turn, fosters your employees’ desire to excel in their jobs and continue working at your company. However, employers need to be careful in their award gift selections. Otherwise, your employees may get the unexpected “benefit” of having to pay taxes on their achievement awards – something that won’t make employees happy.
Generally, per the IRS, tangible personal-property awards given to employees for safety or length-of-service achievements ARE NOT taxable, if the following rules are met:
- The award is a tangible item like a plaque, watch, ring or pen. (Awards of cash, gift certificates or other intangible items like vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds or other securities ARE)
- The cost of the award doesn’t exceed the amount you can deduct as a business expense for the year. The maximum, excludable, annual award amount per employee is $1,600 ($400 for awards that are not “qualified plan awards.” A qualified plan award is an achievement award that: a) Is given as part of an established, written awards program; and b) Doesn’t favor employees who make more than $115,000 in income for the preceding year.).
- The award must be given during a meaningful presentation.
Also, employee achievement awards must meet the IRS requirements for business expenses. In order for achievement awards to be tax free to employees, they must meet these conditions:
- Length-of-service awards can’t be received during the employee’s first 5 years of employment or more often than every 5 years. Also the employee can’t receive more than one length-of-service award during the year.
- Safety awards can’t be made to more than 10% of eligible employees (excludes managers, administrators, clerical employees or other professional employees) during the same year.
If the cost of an employee achievement award is more than your business expense allowable deduction for the year ($1,600 for a qualified plan or $400 for a nonqualified plan), you must include as income to the employee’s wages the larger of the following amounts:
- The portion of the award cost to the employer that is more than your allowable deduction (but not in excess of the award’s fair market value).
- The amount by which the fair market value of the award exceeds the maximum dollar amount allowed as a deduction.
The remaining value of the award would be excluded from the employee’s wages.
The tax implications surrounding employee appreciation awards programs can be confusing. But The Payroll Department, a payroll services provider located in Hendricks County, is here to answer your questions. We can help take the confusion out of how to handle payroll taxes when it comes to your small business’s employee appreciation award program. Give us a call today for more information.
– Ariane of The Payroll Department Blog Team