The Tax Implications of Employee Awards

Giving awards to employees is great motivation and improves employee morale. But there are limits to how much you can deduct for these awards, including employee achievement, safety, and service awards. You also need to know the tax implications for employees of these awards. If they are taxable, you must deduct payroll taxes from the award.

Deducting Employee Achievement Awards

Businesses can deduct certain award costs, but there is a limit.

You can deduct up to $1,600 for awards of tangible personal property given to any one employee annually if they are a part of a written plan or $400 for awards outside of an established plan. You may qualify to deduct more if the award is a part of a written plan.

For example, you can deduct the cost of a watch for 30 years of service or a plaque for a safety award. This limit does not apply to awards made as part of a qualified retirement plan.

The IRS has special rules for employee achievement awards made by partnerships.

In this case, the deduction limits "shall apply to the partnership as well as to each member thereof." The purpose here is likely to avoid having the partnership get around the rules by having individual partners offer the awards.

Defining Tangible Personal Property

Tangible personal property is a property that is owned by an individual or a business that is movable and is not land or buildings. So a plaque or a watch would be personal property. Cash and cash equivalents such as gift cards are not classified as personal property.

You can provide a catalog of products and allow the recipient to choose one since the products are tangible personal property. These catalogs often have different cost levels for different lengths of service; more costly gifts for longer service.

Service, Safety, and Suggestion Awards

If you want the awards you give employees to be non-taxable to them, make sure that you have followed all IRS regulations.

Length-of-service awards may be non-taxable to employees if: 

• They are not "disguised pay"
• They are given as part of a written "qualified" program
• They don't favor highly compensated employees
• They don't exceed $400 per employee for non-qualified plan awards, and they don't exceed a total of $1,600 a year for all awards of any kind. 
• Length of service awards can't be received during the recipient's first five years of employment, or more often than every five years.

Safety awards, to qualify as non-taxable, (a) cannot be given to more than 10% of the employees, and (b) can't be given to managers, administrators, clerical employees, or other professional employees.

When Employee Awards Are Taxable to Employees

The cost of tangible personal property awards under the limits set by the IRS is not taxable to the employee.

However, if your tangible awards to an employee exceed the business deductible threshold of up to $400, they do have to include the overages in their income when filing taxes.