A common question about implementing an awards and recognition program is whether or not employees are required to claim their awards on their taxes. The ever-changing federal and state regulations can make it difficult to stay on top of tax codes associated with rewards and incentives given as part of an employee program. Employers may give tangible awards up to $400 in value for each employee without requiring taxable income reporting.
Understanding the general income tax guidelines for your state can improve the success of your program. Most importantly, knowing what types of awards are taxable or nontaxable can help both your company and your employees avoid unwelcome issues. It is important to stay up to date with your state’s requirements and adjust your company’s recognition program accordingly.
As a general rule, awards given to an employee in association with their employment or work are typically taxable as gross income. Even if the award is given in the form of a gift card or travel voucher it is considered a cash-based award. Awards that are classified as cash bonuses must be treated as taxable income. According to the IRS changes, non-tangible personal property achievement awards are considered taxable employee income.
Non-tangible personal property includes:
- Cash
- Gift cards
- Gift certificates
- Vacations
- Sporting or theater event tickets
- Meals
It is for this reason that companies are being encouraged to use tangible awards to recognize employees. Tangible awards are physical products and awards given to employee in recognition of their achievement. These are items that can be seen and touched.
Tangible award examples include:
- Jewelry
- Electronics
- Tools
- Sporting equipment
- Plaques and trophies
- Apparel
Companies wanting to gift employees with tangible rewards often turn to employee recognition software provided by a recognition service provider. Through the use of a points-based rewards program, employers can recognize and gift employees with tangible award items. Employees earn points for performing work related tasks and meeting company goals. Points can be redeemed for items available through the recognition software.
For companies that traditionally give cash, gift cards, tickets, meals, stocks, lodging, or other non-tangible rewards, the IRS changes in 2018 may affect your employee recognition program. Many companies are refocusing their recognition programs to include mostly tangible rewards. The IRS allows employers to exclude certain achievement awards from employee wages if the awards are considered tangible personal property.
Employee recognition programs encourage employee engagement and help businesses achieve several goals that affect their overall bottom line. Through rewards and recognition, companies could improve customer retention, reduce employee turnover, and increase sales numbers. For programs to be successful, companies have to be mindful of state and federal tax codes for reporting gifts employees receive in association with their work. Visit IRS.gov for more information about the Tax Cuts and Jobs Act.