Generally, all amounts received by an employer are considered taxable income to the employee. There are certain exceptions to that general rule, and many of these exceptions are considered employee fringe benefits. Employee recognition or achievement awards fall within this category.
Employee Achievement Awards
Employee achievement awards are terms of art in the Internal Revenue Code; and if certain requirements are met, these awards are eligible for preferential tax treatment for the employee. An employee achievement award must be an item of tangible personal property, and it must be given to an employee for his length of service or for some safety achievement. The award must also be given as part of a meaningful presentation. The circumstances surrounding the award must also demonstrate that this award is not likely to be disguised pay.
Length of Service Awards
Employee achievement awards for length of service must meet additional requirements under the Internal Revenue Code. These awards must not be given prior to the employee’s fifth anniversary of employment with the employer. Also, the employer may not have awarded the employee a length of service award, unless it would constitute a de minimis award (meaning it has a value of less than approximately $25) for the prior four years.
Safety Achievement Awards
Another type of employee achievement award that can be excluded from an employee’s income is a safety achievement award. There are additional requirements for awards to be considered safety achievement awards as well. In order to qualify, an award must not have been given to a manager, administrator, clerical employee or other professional. Moreover, more than 10 percent of employees may not have received a safety achievement award.
If an employer gives an employee an employee achievement award, the amount of the award will not be considered income to the employee provided the above requirements are met. If the award does not meet the requirements, the value of the award must be included in the employee’s gross income.
As an employer, if the award meets the Internal Revenue Code’s requirements for an employee achievement award, the cost of the achievement award given to any individual employee, during the taxable year, may be deducted. The deduction is limited to $400 for awards that are not part of a qualified plan and $1,600 for all awards, whether or not they are part of a qualified plan.