Original Date: November 26, 2018
Many of our organizations award employees based on length of service, safety-achievement, productivity goals, employee of the month, employee of the year, continuous improvement metrics, lean six sigma, spot bonuses, etc. What are the tax implications on these employer sponsored awards? Does this impact the employees end of the year W-2? How much can we give as an award without impact to taxes? Awarding employees for performance is a great idea, if we do this consistent and fairly. As employers, we need to ensure we follow the IRS guidelines on taxation as well.
Below are 6 requirements for employer related awards:
- Employers can deduct a maximum amount for a single employee in a single tax year for both service and safety awards is $400 for an unqualified plan and $1,600 for a qualified plan.
- A qualified plan will be established if it is written and if the average combined value of service and safety awards per employee in the given tax year does not exceed $400.
- The awards must be defined as “tangible personal property.” Award certificates, cards or credits are not eligible unless they are redeemable only for tangible personal property.
- Length of service awards are recognition that many of our organizations award to employees that work for several years. They may be given tax-free to an employee only on a fifth anniversary and then only once every five years after that; ten, fifteen, twenty, etc. The five-year plan is standard for many organizations.
- Safety-achievement awards may be given tax-free to no more than 10 percent of eligible employees in any one years.
- Productivity awards are never eligible for tax benefits.
IRS Publication 525 (2017), Taxable and Nontaxable Income
Many other restrictions can and do apply to tax implications related to employer related awards. These are federal IRS guidelines, ensure you review any state and local taxation requirements prior to developing a policy or giving an award. Safety awards, length of service, spot bonuses are great options for organizations. However, if we provide a gift card or award to an employee in March and then it shows up on their taxes at the end of the year, the positive momentum can end quick, if the employee was unaware of the added tax accountabilities during the taxation year. Communicate the tax implications upfront to ensure no confusion or negative feedback. Develop a policy and practice that is consistent throughout the organization. Seek guidance on other questions related to employer related awards, the tax laws can be confusing and complex.
– Matthew Burr, HR Consultant