Hand out tax-free achievement awards

businessman holding moneyIs morale down in your workplace? There’s a low-cost way you can start the creative juices flowing.

Strategy: Start a program for employee achievement awards. If you handle things the right way, the prizes are tax-free to the employees and fully deductible by your company.

However, you can’t use an awards program as a means to disguise taxable compensation.

Here’s the whole story: The tax law defines an “achievement award” as an item of tangible personal property granted to an employee for either length of service or promoting safety. This includes items ranging from gold watches to smartphones. But cash or cash-equivalent gifts (e.g., gift certificates) don’t qualify as tangible personal property.

The plan must meet these requirements to qualify for favorable tax treatment.

HR Forms D
  • Any employee may receive a length-of-service award, but safety awards cannot be made to managers, administrators, clerical workers and other professional employees. Also, an award doesn’t qualify if the company granted safety awards to more than 10% of the eligible em­­ploy­­ees during the same year.
  • The award must be part of a “meaningful presentation.” The occasion should be marked by a ceremony befitting the occasion.
  • The 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. The maximum for a qualified award is $1,600 (including any nonqualified awards). Any excess can’t be deducted by the employer and is taxable to the employee.

For a “qualified” award, two additional re­quire­­ments must be met.

   (1) The award must be paid under a written plan that doesn’t discriminate in favor of highly-compensated employees.

   (2) The average cost of all employee achievement awards granted during the year cannot exceed $400. In determining the average cost, awards of nominal value (i.e., $50 or less) aren’t taken into account.

Tip: You’ll find employees are usually more motivated if there’s a goal to attain.