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Tax-Free Awards

It’s that time of year again…tax time. While service awards may not be the hottest trend in recognition, at this time of year we remember one of the distinct benefits of service awards: they are tax-free. Here are some helpful tax tips for rewarding your employees for sticking with your company:

 Employee Achievement Awards are items of tangible personal property given as part of a meaningful presentation recognizing an employee’s safety achievement or length of service.  Performance awards do not qualify as Employee Achievement Awards.

• Only awards of “tangible personal property” will qualify as Employee Achievement Awards. Tangible personal property does NOT include-

              –Cash, a gift certificate, or any other certificate that may be converted to cash

              –Travel or vacations

              –Meals

             –Lodging

             –Tickets to theater or sporting events

            –Stocks, bonds, or other securities

• The “meaningful presentation” doesn’t have to be elaborate, but it must be a ceremonious observance celebrating the employee’s achievement.
• Awards for fewer than five years of service are not considered Employee Achievement Awards under the tax laws, although it is still highly recommended to recognize for those years given the tendency for employees today to job-hop more frequently.

A “Qualified Plan Award” is an Employee Achievement Award that is part of an established, written plan or program and does not discriminate in favor of highly-compensated employees.

• In order for an Employee Achievement Award program to be a “Qualified Plan,” the average cost of all Employee Achievement Awards for the year per employee must be $400 or less.
• If an Employee Achievement Award is legally deductable by the employer, then the award does not have to be claimed as income by the employee. 

Certain employee awards that do not qualify as Employee Achievement Awards (for example, rewards for performance or on-the-spot achievement) may nevertheless be tax-free if they qualify as “de minimis fringe benefits.”

• To qualify as a “de minimis fringe benefit,” the gift’s value must be so small as to make accounting for it impractical. Clearly, this is a somewhat vague restriction, and some companies interpret a gift under $25 as de minimis, while others might use the $50 or $100 mark. Examples of de minimis fringe benefits include a key ring given to the employee as an onboarding gift or a $25 gift selection as part of an on-the-spot recognition program.

Of course, the main motivation for celebrating employee service milestones and achievements is to let them know that they are valued and appreciated. But it doesn’t hurt to reap some “fringe benefits” of your own from your recognition program!