Giving Employee Awards? Know the Tax Implications
Can My Business Deduct the Cost of Employee Awards? Are Awards Taxable to Employees?
Giving awards to employees is great motivation and improves employee morale. But there are limits to how much you can deduct for these awards, including employee achievement, safety, and service awards.
You also need to know the tax implications for employees of these awards. If they are taxable, you must deduct payroll taxes from the award.
How Much Can I Deduct for Employee Achievement Awards?
You can deduct up to $400 for all awards of "tangible personal property" given to any one employee annually. For example, you can deduct the cost of a watch for 30 years' service or a plaque for a safety award. This limit does not apply to awards made as part of a qualified retirement plan.
What Kinds of Awards are Restricted from Being Deductible?
The IRS defines the term "employee achievement award" to include length-of-service awards, safety awards, and awards given during "meaningful presentations." The award should "not create a significant likelihood of the payment of disguised compensation."
What is “Tangible Personal Property?” Are Gift Certificates OK?
Gift certificates don’t count as awards for this deduction because they are not “personal property.” Personal property is property that is owned by an individual or a business that is movable and is not land or buildings. So a plaque or a watch would be personal property.
You can give a catalog of products and allow the recipient to choose one since the products are tangible personal property. Those catalogs have different cost levels for different lengths of service; more costly gifts for longer service.
The Recognition Professionals International organization says,
Other items that are not tangible personal property include travel, vacations, meals, lodging, tickets to theater or sporting events, and stocks, bonds, or other securities.
Awards Given By Partnerships
The IRS has special rules for employee achievement awards made by partnerships. In this case, the deduction limits "shall apply to the partnership as well as to each member thereof." The purpose here is probably to avoid having the partnership get around the rules by having individual partners offer the awards.
Service, Safety, and Suggestion Awards
If you want the awards you give employees to be non-taxable to them, make sure that you have followed all the IRS regulations.
Length-of-service awards may be non-taxable to employees if:
- They are not "disguised compensation" (an IRS term)
- They are given as part of a written "qualified" (IRS term) program
- They don't favor highly compensated employees
- They don't exceed $400 per employee for non-qualified plan awards, and they don't exceed a total of $1,600 a year for all awards of any kind.
- Length of service awards can't be received during the recipient's first 5 years of employment, or more often than every 5 years.
A qualified plan for awards must be an established or written plan that does not favor highly compensated employees. In addition, the average cost of all employee achievement awards given during the year can't exceed $400.
Safety awards, to qualify as non-taxable, (a) cannot be given to more than 10 percent of the employees, and (b) can't be given to managers, administrators, clerical employees, or other professional employees.
Suggestion awards. You set up a suggestion box in the break room for employee suggestions and you offer an award for the best suggestion of the month. This suggestion award may be non-taxable to the employee if:
- The employee wasn't required to give the award, and it was given without your knowlege
- It meets the average $400 limit and total $1600 limits (above)
- The suggestion wasn't part of the employee's job, and
- The amount wasn't based on the employee's salary.
When Employee Awards Are Taxable to Employees
The cost of tangible personal property awards under the limits set by the IRS is not taxable to the employee. All other awards are considered compensation, including awards of travel and gift certificates, and are subject to payroll taxes.
You must withhold federal and state income taxes from these awards, and these awards are subject to FICA taxes (Social Security and Medicare) for both employee and employer.
To determine the taxable amount of an award to an employee, you must consider fair market value, not cost. For example, if you purchased some TV monitors at a deep discount and gave them to employees, you must find the retail price and use that to determine the taxable amount to employees.
Read more about how the IRS considers employee awards.
Disclaimer: This article is presented as general information, but it should not be relied on as complete or as tax advice or to be used to prepare a business tax return. Your individual business circumstances may affect the deductibility of any business expense. Before you make any business decisions which may have an effect on your taxes, check with your tax professional.