can do a lot for employee morale and, indirectly, the company's bottom line. But before your company begins handing out gifts and special awards to the staff, check with the department. Why? Most gifts are fully taxable to employees. That's not much of a performance incentive. There are legal ways to avoid the tax trap, however.
The two most common employee recognition awards are for employee-of-the-month and attendance. Common as they are, though, many employers miss the tax-free mark on such awards. For example, giving a gift certificate or gift card is a popular and easy way to reward an employee. It's also completely taxable, since a gift certificate has a face value. There are three categories of tax-free employee recognition awards.
1. De minimis. 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.
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. 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.
OTHER EMPLOYEE GOODIES
Many other items qualify as de minimis fringe benefits, in addition to employee recognition awards. What do all de minimis fringes have in common? Again, they're non-cash, have a nominal value, and are provided infrequently to employees. This makes them, overall, administratively difficult to account for. Examples: parties and picnics; traditional holiday gifts with a low value, such as turkeys; occasional tickets to the theater or a game; coffee and doughnuts; local phone calls; personal use of the company's photocopy and fax machines; and fruit, books, or other gifts given to employees on special occasions.
WHAT ABOUT OVERTIME?The value of employee gifts that are based on hours worked, production, or efficiency must be included in their regular rates for overtime calculation purposes. Safety achievement awards may fall into this category. Flip side: Length-of-service awards and de minimis fringe benefits can be excluded from the regular rate calculation.
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