Companies who implement recognition strategies throughout their organization yield higher performance, retention, and safety levels versus those using other forms of incentives. The IRS sees the value of employee recognition and makes specific allowances for deductions.
Employee recognition awards that involve money are taxable, both as income for the employee and as compensation for the employer. Other kinds of awards are tax deductible, such as non-cash awards for length of service to the company or for achievements in safety. Determining whether or not an award is tax deductible is important. We need to understand what constitutes a tax-deductible award. Before deciding what to give an employee, ask yourself a few simple questions to avoid accounting and tax problems later on. Frankly, many award products will fall under what the IRS calls de minimis award. Although they do not put an exact monetary value on the de minimis award, if you keep the budget under $100 per award they will likely fall within this guideline. But if you want to exceed the $100 budget, an employer can deduct up to $400 for employee achievement awards given to any one employee for ‘qualified plan awards’ during a single tax year. Recognition and Award Programs qualify for tax benefits provided they meet some pretty broad criteria.
Assuming your plan does not favor highly compensated employees, you may be able to deduct up to $1,600 of these awards per employee per year as a non-wage expense.
See if your awards meet the criteria:
– Award is an item of tangible personal property.
– Award is given by reason of employee’s length of service, productivity, or safety achievement.
– Award is given as a part of a meaningful presentation.
– Award is given under circumstances free of significant likelihood of its being payment of disguised compensation.
-The Award does not discriminate in favor of highly compensated employees.
– Award is part of the company’s award plan, provided the plan does not discriminate in favor of officers, shareholders, or highly compensated employees.
Review the employee’s file to see if she has worked for your company for at least five years. Length-of-service awards for five years or longer are tax-exempt as long as you have not rewarded the employee for length of service in previous years, and as long as it is awarded during a presentation.
Look at the employee’s safety record. The IRS states that safety awards are also tax deductible, as long as the award is not being given to a manager, administrator, clerical employee or another professional employee. Additionally, if more than 10% of eligible workers have received a safety award during the year, the awards will no longer be tax deductible.
Consider the type of award you are giving the employee. Cash awards or cash equivalents are taxed awards. The only exception to this is if the award is a de minimis award, meaning that the amount is so small that it would be unreasonable to track such an award. There is no set dollar amount for a de minimis award, although the IRS has stated that it considers $100 to be too much for de minimis.
Look at the value of the award if it is a non-cash award. The amount you will need to pay taxes on — or deduct, if it is tax deductible — is the fair market value. The fair market value is not the same as what you paid for it. Rather, it is the amount the employee would have to pay if he were buying the item from a third party.
Does your award meet the above criteria and is the average cost of all employee achievement awards provided during the year below $400 per quarter?
Please keep in mind, I design and fabricate really cool awards for a living. I am not a tax adviser. I am confident you can recognize the excellence in your organization and deduct the costs but I highly recommend you consult your tax accountant if you intend to spend over $400 per employee. I can make amazing awards for way less than $400 per employee. Recognition doesn’t have to cost a lot. A few meaningful words captured on a perpetual object will go a long way to make your employees engaged and enhance their performance.
Harness the Power of Recognition