Tax Issues—Corporate Employee Reward Programs

According to George Delta, Esq., Tax Advisor to The Incentive Federation, Inc., in an article published by Incentive Magazine in November 2001, there is much confusion and many misconceptions about taxes and employee achievement programs. The following are answers to the most frequently asked questions about tax issues and how they effect employee reward programs.

Are Employee Achievement Rewards Non-Taxable?

The Tax Reform act of 1986 dictates that an employer may deduct the cost of achievement awards given to the same employee up to $400 in any year. If the incentive awards are awarded as part of one or more established written plans or programs of the employer, the $400 deduction limitation is increased to $1,600 per employee. This means that if your company establishes a formal safety or years of service program, the company can award up to $1,600 for an individual employee but no more than $400 per employee for all employees.

An “employee achievement award” is defined in the Internal Revenue Code (IRC) as an item of “tangible personal property” transferred by an employer to an employee for safety, achievement or for length of service. Moreover the award must be given as part of a meaningful presentation and cannot be disguised as compensation to the employee.

Accordingly, to be tax exempt, an employee incentive reward cannot be in the form of cash, charge or credit card or a gift certificate. Also, other items that are not tangible personal property and hence not tax exempt include travel, vacations, meals, lodging, tickets to theater or sporting events and stock certificates.

Are Gift Certificates And Debit Card Rewards Taxable?

There is a common belief that gift certificates and debit card rewards do not have to be taxed since they are not cash. They are in fact taxable. Here is the IRS summary of what the tax code section says:

An incentive award cannot be in the form of cash or a gift certificate ( other than a non-negotiable certificate conferring only the right to receive personal tangible property). Any certificate that may be converted to cash is not “tangible personal property” and cannot qualify for preferential tax treatment.

Are Years of Service Rewards Taxable?

A length of service award can be excluded from an employees income only if it is ”tangible personal property” and is received after his or her first five years of service.

Are Gifts With Company Logos Taxable?

Logo’d gifts under $4.00 in value are tax free. Anything over that is taxable—regardless of whether or not it has a logo.

Are other Achievement Awards such as Employee Recognition or Productivity Programs Tax exempt?

The 1986 act specifically eliminated productivity from the regulations. The Act exclusively states that an incentive award can be given to employees for safety, achievement, or length of service only.

Note: The information published here is not intended to serve as tax advice, or consultation guidance. Companies sponsoring incentive programs or employee achievement programs should consult their tax attorneys or accountants to verify the taxable status of their employee incentive rewards.