Small business owners are a hard-working lot and when there are employees who are working hard alongside them, they recognize that and want to reward those efforts. Special cash and gift bonuses and awards come to mind, but that opens up a whole slew of questions because there are rules as to what is and is not taxable as income. It’s complicated for a business owner, but don’t let that keep you from rewarding valuable employees. Here’s some information that will help you make good decisions about employee perks.
Employee gifts, prizes, awards, and events
For the purpose of this article, we are going to call anything “extra” given to an employee a gift. Of particular note is that these gifts are not a contracted part of their compensation plan, such as a quarterly bonus. These gifts are generally one-time awards or sporadic and can even include events such as parties or celebrations.
That being said, these gifts can be broken down into 2 categories for simplicity sake. Those categories are cash and non-cash.
All cash gifts are considered in with the employee’s regular straight-time wages and are subject to Federal Income Tax Withholding (FITW), FICA, and FUTA as well as all applicable state and local payroll taxes. This would include cash prizes or awards for:
- On the job performance such as production, attendance, efficiency, and any other on-the-job achievements
- Discretionary (lump-sum) bonuses. The employer must decide the amount and when these are given and are a surprise to the employee.
There are some exceptions, including:
- Length of service awards are federal taxable wages if given before 5 years’ service, but non-taxable after 5 years’ service, and not more frequently than every 5 years.
- Safety awards are excluded from federal taxable wages if also given to management, administrative, professional, clerical, and part-time employees, but not to more than 10% of eligible employees during the tax year. If greater than 10% of eligible employees receive the award, all employee safety awards are taxable.
Some non-cash gifts are taxable and others are not and the rules may be confusing. For instance, fruit baskets, wine, flowers, a turkey or a ham, tickets to a show, sporting or other event are generally non-taxable, if given infrequently. However, cash in-kind gifts such as gift certificates in any amount are subject to FIT, FITW, FICA, and FUTA. That means a gift certificate to purchase a ham, turkey, wine, or flowers is taxable, but the actual ham, turkey, wine, or flowers are not.
Non-cash awards include prizes and gifts given for all the afore-stated awards. That means that if an employee were to receive a set of golf clubs instead of a cash award, the fair market value (FMV) of the golf clubs is taxable. Note that there is a difference between the cost (money actually paid) and the FMV. Include the FMV in the wages and apply all taxes.
Events, parties, and celebrations are different. 100% of the cost is deductible for the business, and is nontaxable to the employee, as long as the event is infrequent and promotes employee health, goodwill, or efficiency. Examples would be company picnics, holiday parties, or product launches.
Exclusions for length of service or safety awards [IRC §3121 (a) (20)] must conform to the following guidelines under both cash and non-cash awards in order to apply:
- Are not “disguised compensation”
- Are awarded in accordance with a written, qualified plan or program that does not favor highly compensated employees
- Do not exceed an average of $400 per employee ($1,600 per year) under a qualified plan, or, if not paid under a qualified plan, do not exceed $400 per employee
- Not tangible personal property, cash, or cash equivalents, such as stocks, bonds, meals, lodging, or sports or theater tickets
- Given in some sort of ceremony [IRC74(c), 274(j)]
Payroll is complex, especially when it comes to payroll taxes
Business owners think that all they want to do is reward valuable and reliable employees and, in some instances, the complexity of the payroll tax regulations can prevent that from happening. That doesn’t make anyone happy. Here at The Payroll Department, we don’t want employers or employees to not do what they feel is right or appreciate because of those concerns. When you outsource your payroll process to The Payroll Department, we take over the complexity and reduce the risks involved with payroll and payroll taxes.
Talk to us when you want to give out awards or reward your employees and we will work with you to be sure that the laws and regulations are followed. We remove payroll and payroll issues from your list of topics to worry about in your business. Call the experienced payroll professionals today at 317-852-2568.
-Elaine of The Payroll Department Blog Team