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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. Safety-achievement awards may be given tax-free to no more than 10 percent of eligible employees in any one years.
  6. Productivity awards are never eligible for tax benefits.

Helpful Link:

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

Published by Mathew W. Burr, MBA, MHRIR, GPHR, SHRM-SCP, SPHR, CPHR

Matthew Burr has over eleven years of experience working in the human resources field, starting his career as an Industrial Relations Intern at Kennedy Valve Manufacturing to most recently founding and managing a human resource consulting company; Burr Consulting, LLC. Prior to founding the consulting firm, the majority of his career was spent in manufacturing and healthcare. He specializes in labor and employment law, conflict resolution, performance management, labor and employment relations. Matthew has a generalist background in HR and provides strategic HR services to his clients, focusing on small and medium sized organizations. In July 2017, Matthew started as an Associate Professor of Business Administration at Elmira College and was promoted into the Continuing Education & Business Administration Department Liaison role in July 2018. He teaches both undergraduate and graduate level business courses at Elmira College. Matthew is also the SHRM Certification Exam Instructor at the college, his students currently have an 80% pass rate on the SHRM-SCP and 92.3% pass rate on the SHRM-CP. Matthew works as a trainer Tompkins Cortland Community College, Corning Community College, Broome Community College and Penn State University. He also acts as an On-Call Mediator and Fact-Finder through the Public Employment Relations Board in New York State, working with public sector employers and labor unions. Matthew has publications at the Cornell HR Review, Business Insider, New York State Bar Association, Expert 360 (in Australia). In early 2017, he published his first book, “$74,000 in 24 Months: How I killed my student loans (and you can too!).” Matthew has an associate's degree in business administration from Tompkins Cortland Community College, a Bachelor of Science degree in business management from Elmira College, a master's degree from the University of Illinois School of Labor and Employment Relations in Human Resources & Industrial Relations and a Master’s in Business Administration specializing in entrepreneurship from Syracuse University. He currently holds a Lean Six Sigma Green Belt, Senior Professional in Human Resources (SPHR), Global Professional in Human Resources (GPHR) and the Society of Human Resource Management Senior Certified Professional (SHRM-SCP) certifications. Matthew has been featured on CNN Money, Fast Company, Fits Small Business, Magnify Money, My Twin Tiers, Namely, Student Loan Hero, Smart Sheet and CEO Blog Nation.

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