Reward your employees with tax-free income

In today’s tight job market, small business owners are finding it increasingly difficult to keep good employees on board and content. A much-overlooked employee benefit – employee achievement awards – can allow you to reward your best employees with tax-free income.

What is an employee achievement award?

As an employer, you may give your employees cash or other tangible personal property to reward them for achieving certain standards or milestones within the workplace. In order to qualify as an employee achievement award in the eyes of the IRS, an award must meet the following criteria:

  • Amount limit: not to exceed $400 per employee for awards that are not “qualified plan awards,” with the total for all awards not to exceed $1,600 (whether qualified or not). A qualified plan award is one that is awarded as part of an established plan that does not take into consideration compensation as to eligibility or benefits.
  • Form of award: the award must be tangible personal property that is:
    • Based upon length of service or safety achievement;
    • Is given in a meaningful presentation; and
    • Is not merely “disguised pay.”

 Who can receive these awards?

Length-of-service award. In order to be eligible to receive an award based upon length of service with the employer, an employee must:

  • Have worked for the employer for more than 5 years, or;
  • Have not received a length-of-service award during the year of the award or in any of the prior 4 years.

Safety achievement award. In order to be eligible to receive an award based upon safety in the workplace, an employee must not be a manager, administrator, clerical or other professional employee. Also, if more than 10% of the employees are given the award, it will not qualify under this provision.

How much can I deduct?

As an employer, you are entitled to deduct an amount given for employee achievement awards up to the amount limits specified above. This amount would be included on the “Other deductions” line of your company’s tax return.

How much is taxable to the employee?

As long as the award given does not exceed the amount limits specified above, the award will not be includible as wages to the employee. Any awards given on excess of the limits would be includible in the employee’s wages.

While definitely not on the same level as stock options in a pre-IPO company as an employee retention tool, employee achievement awards are a nice way to reward your best employees with tax-free income. If you need more info regarding these types of awards, please feel free to contact the office.