Implementing recognition and incentive programs requires an awareness of the tax codes associated with these types of awards. While ever-changing federal and state regulations make it difficult to determine the exact requirements that would apply to every recognition initiative, understanding general income tax guidelines will increase the potential for a successful program and, more importantly, avoid unpleasant surprises for both the corporate sponsor and the program participants. This article outlines key concepts, based on current practices, and is up to date with the Tax Cuts and Jobs Act (Public Law 115-97) recently implemented on December 22, 2017.
The principles outlined herein have been derived from IRS publication 535. To view the IRS publication in whole, visit https://www.irs.gov/publications/p535.
The General Principle
As you might expect, since awards are given to an employee or associate for work related to their employment or relationship to the company, they are typically taxable as gross income. This applies whether the award is cash-based or in the form of merchandise, gift cards, or travel.
Cash bonuses or gifts. When you award employees with cash (or gift certificates, or similar items easily exchanged for cash) you must report the value of such gifts as extra salary or wages, regardless of the amount involved.
Prizes in the form or goods or services. If you award prizes or bonuses in the form of goods or services (e.g., a vacation trip for meeting sales goals), you must report the fair market value of the goods or services in the employee’s income.
Gifts of de minimis (minimal) value. If you provide employees with a product or service and the cost is so small that it would be unreasonable for you to account for it, the value need not be included in the employee’s income. Examples include holiday gifts, occasional theater or sporting event tickets, flowers, fruit, or books. There is no set dollar limit, but the IRS has ruled in at least one case that a gift over $100 must be treated as taxable income.
Length of Service Award - Exception
Awards of tangible personal property given to employees for length-of-service are not considered employee income if the value of the award does not exceed limits specified in the Internal Revenue Code.
An award will not qualify as a length-of-service achievement award if either of the following applies
- The employee receives the award during his or her first 5 years of employment.
- The employee received a length-of-service award (other than one of very small value) during that year or in any of the prior 4 years.
Safety Awards - Exception
Similarly, awards of tangible personal property given to employees for safety achievement are not considered employee income if the value of the award does not exceed limits specified in the Internal Revenue Code.
An award will not qualify as a safety achievement award if it is given to either of the following.
- A manager, administrator, clerical employee, or other professional employee.
- More than 10% of the employees during the year, excluding those listed in (1).
The Value Limits
The IRS value limits for service and safety awards are:
- $400 per employee per year for all awards presented under a non-qualified plan; or
- $1,600 per employee per year under a qualified written plan that does not favor highly compensated employees and that has an average benefit of $400 or less per employee over the year.
Reporting and Documentation
The reporting of awards and taxable income is dependent on the type of recipient.
- For direct employees, the Fair Market Value of awards in a given tax year should be reported on their Form W2, and will typically be subject to federal and state payroll tax withholding, within the limits and exceptions outlined above.
- For non-employees (independent contractors, distributors, dealers, etc.) the Fair Market Value of the award(s) will be reported on Form 1099-MISC, assuming the total of all such compensation exceeds $600 in the tax year.
- The payer is not required to issue a Form 1099 if the award is made to a corporation. The program provider should be able to provide clear Fair Market Value reporting to the sponsor of the program.
More information in regards to employee recognition and tax responsibilities can be found at https://www.irs.gov/publications/p535
Changes Outlined in the Tax Cuts and Jobs Act (2017)
The changes made to the U.S. tax code in December 2017 by Public Law No: 115-97, mentioned above, had minimal impact on the rules governing companies' management of employee achievement rewards programs. In the new law, Congress clarified the definition of the term 'tangible personal property' by outlining the following. "…The term ‘tangible personal property’ shall not include- cash, cash equivalents, gift cards, gift coupons, or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items pre-selected or pre-approved by the employer), or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items.”
In short, recognition gifts that are encompassed in the above definition of 'tangible personal property' will remain separate from employee compensation eligible for taxation. Further, the cost of such programs will also remain as an available deduction to participating employers.
Tax and Legal Advice Disclaimer
Awardco does not provide tax, legal, or accounting advice. The material in this document has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. Sponsors, owners, and those responsible for creating and managing recognition and incentive programs should consult their own appropriate advisors.