Tax Implications of Recognition Rewards

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Please note that this information is just a highlight of the guidelines from the tax code regarding employee awards.

• Taxable awards: Most prizes, awards, and gift certificates are taxable as gross income. The following must be included in an employee's gross income:

  * Awards for outstanding sales or production or for sustained individual performance
  * Awards in contest of all types
  * Travel awards

• Nontaxable awards: Companies are allowed to give a business gift costing as much as $25 per year to each employee tax-free. Achievement awards of tangible personal property for length of service or safety are excluded from employee income, as are achievement awards that are transferred to charity at the recipient's request. Special deduction limits apply to these awards, provided they are given as part of a presentation under circumstances indicating that they are not a form of disguised compensation.
• Length of service awards: Every employee can receive a $400 service award for every five years of service. Only one length of service award every five years is considered to be an employee achievement award.
• Safety achievement awards: 10% of a company's employees can be given up to $400 annually to reward safety. Such awards granted to managers, administrators, clerical employees, or professional employees are not considered employee achievement awards. Group travel awards are deductible as a business expense, and a $200 to $300 allotment of work clothes is allowed each year.

A rewards program should be designed so that it does not cost the company or the award recipients unexpected taxes. Perhaps the best strategy is to give nonmonetary awards. After all, what employees want the most is to be valued for a job well done by those they hold in high esteem.

Copyright © 1999 Bob Nelson, Nelson Motivation Inc.

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