Employer Incentives - Taxable or Not?

Posted by Andy
As an employer you likely want to reward those employees that have been loyal to you over a long period of time or have made some other noteworthy acheivement. Unfortunately, if you give a gift or check to an employee it will be considered compensation (and therefore taxable) unless it meats one of the IRS's exceptions. Those are:

1. De minimis fringe benefits. Awards qualify as de minimis fringe benefits and may be excluded from recipients' incomes if they are:

  • given occasionally;
  • non-cash; and
  • nominal in value.

Examples: plaques, certificates of achievement, mentions in internal newsletters.

2. Length-of-service awards. That gold watch, for example, can be pricier, but may not be given for fewer than five years of service.

3. Safety achievement awards. These awards are tangible, but must be limited to 10% of eligible employees a year. Managers can't receive these awards.

Other things to note regarding awards: "Length-of-service and safety achievement awards come with some additional strings. First, these awards must be part of a meaningful ceremony. Meaningful is flexible. Second, the maximum that any one employee can receive tax-free depends on whether you have a written plan that doesn't discriminate in favor of upper management. If you do, you may exclude up to $1,600 a year from an employee's pay. The average cost per recipient of all awards in a year can't exceed $400. If you don't have a plan, you may exclude only up to $400 from an employee's pay."

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The content on this blog (www.acollinscpa.blogspot.com) is my personal opinion based on my study and understanding of tax laws, policies and regulations. It’s provided for your private, noncommercial, educational and informational purposes only. It’s not a recommendation or endorsement of any company or product. It should not be relied upon as specific tax advice for your personal situation. I strongly suggest that when it comes to filing your taxes, you get additional, professional guidance from individuals who are familiar with your specific circumstances. Those who choose to rely solely upon the information on this site do so at their own risk and peril, and cannot hold the author liable in any form or fashion.

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