Employee Rewards & Taxes
Employers often reward employees for an array of achievements from perfect attendance to meeting a sales goal. The determination of whether a reward is taxable to the employee is on a case-by-case basis. Factors you must consider are the types of rewards, the reason for providing the reward, its value and the methodology for choosing the recipient employee.
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Fringe Benefits
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A fringe benefit is any reward an employer provides to an employee for the performance of services other than salary. The IRS views fringe benefits as an alternative form of payment for services and requires the employer to include all rewards in the employee's taxable wages. However, the IRS rule also provides for the exception of specific types of fringe benefits not subject to taxation.
Achievement Awards
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Employees who receive an achievement award may qualify to exclude the value of the award from taxable income. An award is tax-free to the employee if given in appreciation for length of service with the company or for meeting safety standards. The award must be tangible personal property, such as a trophy or plaque. If the award includes cash, gift certificates or other intangibles such as vacations, meals or stock, the value of the gift will be subject to income tax. Employers can deduct the cost of the award on a business tax return, regardless of the tax treatment to the employee. If the employer gives the award pursuant to a standard written plan that does not favor highly compensated employees, up to $1,600 of awards per employee is deductible per year. Otherwise, the annual limitation is $400 per employee.
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Cash Bonus
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If you recognize employee achievements by paying cash bonuses, the employee's W-2 must include the bonus amount in gross income. The employee is subject to income tax on the bonus amount. Employer's can deduct the amount of cash bonuses on an income tax return as a wage and salary expense.
De Minimis Benefits
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Employees do not pay tax on the rewards that qualify as de minimis fringe benefits. A de minimis benefit covers any gift of property or services to an employee that has such a minimal value, the burden of accounting for it is unreasonable or impractical. Common examples of this type of benefit include occasionally allowing an employee to use the copy machine for personal purposes, holiday gifts with little or no value and infrequent parties. However, a gift of cash or its equivalent can never be a de minimis benefit, regardless of the amount. An employer can fully deduct the amount of de minimis benefits it provides as a non-wage expense on the tax return.
No-Additional-Cost Rewards
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If you provide an employee with free access to services you normally sell to customers and the business does not incur additional costs, you can exclude the service's value from the employee's taxable wages. A deduction is unavailable to the employer since the business does not incur an actual cost. For example, airline employees often receive no-additional-cost rewards by flying on the employer's aircrafts when seats are available.
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