Nothing takes the shine off an employee achievement award faster than having to pay taxes on its value. However, it’s entirely possible to design a recognition program that doesn’t cause tax liability for your employees—and is fully tax deductible for your organization.
Caution: You can’t use an awards program to disguise taxable compensation. For example, the IRS will probably look askance at employee awards that are handed out at the same time as annual salary reviews. Similarly, the program cannot be substituted for a cash bonus plan that previously existed.
Here’s how to design an awards program that complies with tax laws:
Under the tax-law definition, an “achievement” award is an item of tangible personal property granted to an employee for either length of service or promoting safety.
This includes gifts such as watches, necklaces, televisions, iPods, DVD players, golf clubs, etc. However, cash and equivalent gifts (e.g., gift certificates) do not qualify as tangible personal property.
In addition, the plan must meet a few other key requirements to qualify for favorable tax treatment. Here are four to keep in mind:
1. Any employee may receive a length-of-service award, but safety awards cannot be made to managers, administrators, clerical workers and other professional employees. Reason: These positions generally don’t involve safety issues.
2. Furthermore, the award does not qualify if the company granted safety awards to more than 10% of the eligible employees during the same year.
3. The award must be part of a “meaningful presentation.” This doesn’t mean you have to throw a lavish affair, but the occasion should be marked by a fitting ceremony.
4. An employee must have worked for the company a minimum of five years to receive a length-of-service award. Note: An employee isn’t eligible for this type of award if he or she received a length-of-service award during the current year or the previous four years.
How much can an employee receive tax-free? It depends on whether the award is nonqualified or qualified. With a nonqualified award, the annual maximum is $400 per award. With a qualified award , the maximum is $1,600 (including any nonqualified awards). Any amounts over these limits cannot be deducted by the company and are taxable to the employee.
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