Achievement awards can be tax-free
As an employer, you might offer bonuses for things like attendance, productivity, or safety. These might be cash awards or gifts, such as a new flat screen television. Generally, any payment or gift to an employee must be counted as taxable income, unless the law specifically provides an exclusion.
As part of your efforts to retain high-performing employees, you might also offer awards for continued service. Under specific circumstances, awards given to recognize length of service or safety achievements can be excluded from the employee’s taxable income.
This does not mean that you can give every employee a safety bonus, or that you can reward an employee’s continued service every year, without tax consequences. The Internal Revenue Service (IRS) does impose conditions for these achievement awards to be tax exempt.
An achievement award is an item of tangible property that meets all the following requirements.
- It is given to an employee for length of service or safety achievement,
- It is awarded as part of a meaningful presentation, and
- It is awarded under conditions and circumstances that do not create the impression that you attempted to provide untaxed income.
An award will qualify as a length-of-service award only if either of the following applies:
- The employee receives the award after the first five years of employment, or
- The employee did not receive another length-of-service award (other than one of very small value) during the same year or in any of the prior four years.
For example, you could provide a service award every five years, without counting it as taxable income, if the award follows the previously listed program criteria.
An award for safety achievement will qualify for exclusion from taxable income unless
one of the following applies:
- It is given to a manager, administrator, clerical employee, or other professional employee; or
- During the tax year, more than 10 percent of your employees already received a safety achievement award (other than one of very small value).
For example, if all employees receive a bonus for a year with no injuries, the payment could not be excluded from income. However, if you recognize only a few exemplary employees with such awards, such as those making suggestions to improve safety, the amounts might be excludable.
An award of cash or cash equivalent (gift certificates, debit cards, etc.) could not be excluded from income. The award must be in the form of tangible property. Examples would include a watch, jacket, or similar gift. Intangible property cannot be excluded. Examples might include airline tickets, lodging, stocks, or sporting event tickets.
The value of the award must also be within the excludable limits set by the IRS. These limits are $1,600 per year in the case of qualified plan awards, or $400 per year for gifts that are not qualified plan awards.
A “qualified plan award” is an achievement award given as part of an established written plan or program that does not favor highly compensated employees as to eligibility or benefits. A “highly compensated employee” is one who received more than $115,000 in pay during the previous year (this amount may be adjusted annually).
If a gift otherwise qualifies for exclusion, but the value exceeds the permissible limit, you may still be able to exclude part of the value from taxable income. The permissible limits apply to the combined value of all types of awards. For example, if an employee was given a length of service award with a value of $1,500 and, during the same year, was given a safety award with a value of $500, you may be able to exclude up to $1,600 from taxable income, but you would have to count the other $400 as taxable income.
From Mary Borsecnik at J. J. Keller & Associates, Inc.