Myth Versus Fact: Recipe for Employee Gifts and Awards

DECEMBER 2012

 

Myth Versus Fact: Recipe for Employee Gifts and AwardsProviding employees with tax-free fringe benefits, gifts, and awards allows employers to motivate employees and foster feelings of appreciation. However, employers must be careful when selecting benefits and gifts in order to avoid employment taxes and withholding an additional amount from their employees’ paychecks — an unexpected “benefit” many employees will frown upon.

Measuring Gift and Award Taxation

The general rules for taxable and nontaxable gifts and awards are described below.

• De minimis benefits are so small and infrequent that it is actually impractical to account for them, so they are not taxable. This category can total up to roughly $75 per year in noncash gifts.

• All monetary prizes or awards, including gift certificates and points cards redeemable for merchandise (even those in amounts that could be considered de minimis), are taxable. So the gift of a holiday turkey is not a taxable benefit, but a gift certificate to purchase one is taxable income.

• Length-of-service awards are defined as noncash awards of no more than $1,600 in value (or $400 if they are not part of a previously written program not favoring highly compensated employees) given during a meaningful presentation for employees who’ve been employed by the company for five years or more and who have not received another length-of-service award during the prior four years. These are not taxable.

• Noncash, tangible personal-property awards given to employees for safety achievements can be nontaxable if they are awarded during a meaningful presentation to a nonmanagement, nonclerical, nonadministrative or other nonprofessional employee, and no more than 10% of eligible employees have already received their safety achievement awards in the past year. As mentioned above, the award can have no more than a $1,600 value (or $400 if it’s not part of a previously written program not favoring highly compensated employees).

Sifting Through the Myths & Finding the Facts

Myth 1: As long as a company has an employee manual outlining its length-of-service awards, it can give retiring associates any gift. The gift won’t be taxable, including a $2,500 gold watch.

Fact 1: A company may give an employee who’s been in service for five years or more a nontaxable, noncash award as long as the employee has not received another award in the prior four years – and the award does not exceed $1,600 in value.

Myth 2: An employer may gift tickets to a local sporting event to hardworking employees. Since the tickets are $60 each, the employer does not need to withhold taxes.

Fact 2: While a $60 sporting event ticket would generally fall under de minimis benefit rules, an employer must also consider that the de minimis limits are per year rather than per gift. So if some of the employees have received other gifts, the tickets may be taxable.

Myth 3: A company gives a cash safety award to any employee who reports a potential safety concern that is found to have merit. Because the award is only $10, it is nontaxable.

Fact 3: Cash awards are always taxable. If the award is noncash, it still may be taxable if the employer is not giving the award as part of a meaningful presentation and is not limiting the award to nonprofessional, nonclerical associates.

Myth 4: An employer can give employees a nontaxable holiday fruit basket at the end of every year.

Fact 4: If the value of the basket and all other noncash gifts accumulated by each employee throughout the year meets the definition of the de minimis rule, then the basket would not be taxable.

There are many alternatives that an employer should consider when determining employee gifts and awards. CRI’s tax professionals can help you evaluate gifts-and-awards policies and assist in structuring employee benefits to minimize tax liabilities for both you and your employees. And that’s what we call a sweet deal.