Employee Awards & Taxes

It is important to understand the IRS rulings when deciding to create any awards program.  We strongly recommend that you contact your accountant to review the tax consequences of the  program or you can read the actual IRS ruling.  You will find them on the IRS web site.

Here is a quick outline that was sent to us by one of our awards vendors.

TAX Benefits

Companies who implement recognition strategies throughout their organization yield higher performance, retention and safety levels versus those using other forms of incentives.  The IRS recognizes the value of employee achievement recognition and makes specific allowances.

To be free of taxes as described, awards must:

  • fall into a “qualified plan” that does not discriminate in favor of highly compensated employees
  • be an item of tangible property awarded as part of a meaningful presentation
  • fall under an average award cost of $400 with an upper limit of $1,600.  Awards over $1,600 are taxable to the recipient for the amount above $1,600.
  • Service awards may be given every five years beginning at five years of service. 
  • Safety awards must be given to fewer than 10% of eligible employees.  Management, administrative, clerical and professional employees do not qualify

These are not tax exemptions:

  • Cash or cash-equivalent awards   (gift certificates, stored-value cards, gift cards)
  • Even if presented as a service or safety award, the only way these types of awards qualify for tax-exempt status is if they can ONLY be exchanged for tangible personal property.

Tax deduction for employee awards – Summary:

Level 1

  • Businesses may deduct up to $25 per employee per year for gifts given by the employers to their employees.
  • Exceptions:
    • Gifts of nominal value
    • Gifts of advertising nature
    • Gift cards

Level 2

  • Businesses may deduct up to $400 per employee per year for achievement awards.
  • Requirements:
    • 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 if significant likely hood of its being a payment of disguised compensation.

Level 3

  • Businesses may deduct up to $1,600 per employee per year if the gift is an achievement award meeting the following criterion:
    • 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 part of a meaningful presentation.
    • Award is given under circumstances free of significant likely hood of its being a payment of disguised compensation.
    • And, the award is part of the company’s permanent written plan, provided:
      • The plan doesn’t discriminate in favor of officers, share holders or highly compensated employees.
      • The award meets the above criteria and the average cost of all employee achievement awards provided by the employer during the year doesn’t exceed $400 per quarter