You are a payroll specialist at a small firm. Twenty employees have just been approved for awards through your company's new rewards and recognition program. Several of them come to you asking whether the awards are considered taxable income?
The answer depends on the type and value of the award that is granted.
Awards based on performance.
In general, cash and prizes awarded to employees for good work or suggestions are taxable income since they are presented in return for an employee's performance or services. Cash awards and the fair market value of non-cash awards are thus generally subject to federal income tax withholding, FICA and FUTA taxes.
In computing the amount of tax to be withheld for prizes and awards, the fair market value of the award or prize should be treated as supplemental wages, which have a withholding rate of 28%.
Exceptions—Service awards, safety awards.
Awards of tangible personal property given to employees for length-of-service are not considered employee income if the value of the award does not exceed limits specified in the Internal Revenue Code.
- An award will not qualify as a length-of-service achievement award if either of the following applies.
- The employee receives the award during his or her first 5 years of employment.
- The employee received a length-of-service award (other than one of very small value) during that year or in any of the prior 4 years.
Similarly, awards of tangible personal property given to employees for safety achievement are not considered employee income if the value of the award does not exceed limits specified in the Internal Revenue Code.
An award will not qualify as a safety achievement award if it is given to either of the following.
- A manager, administrator, clerical employee, or other professional employee.
- More than 10% of the employees during the year, excluding those listed in (1).
Both service or safety awards must be awarded as part of a meaningful presentation and awarded under conditions and circumstances that do not create a significant likelihood of the payment of disguised compensation.
The IRS value limits for service and safety awards are:
- $400 per employee per year for all awards presented under a non-qualified plan; or
- $1,600 per employee per year under a qualified written plan that does not favor highly compensated employees and that has an average benefit of $400 or less per employee over the year.
De minimis benefits.
If the award is of such a small value that it makes accounting for it unreasonable, it is considered a de minimis benefit and may be also be excluded from income (for example, coffee and doughnuts furnished to employees or holiday gifts with a low fair market value).
CITE: Generally, Internal Revenue Code Secs. 274(j) and 3402(j).
Source: CCH Incorporated is a leading provider of information and software for human resources, legal, accounting, health care and small business professionals. CCH offers human resource management, payroll, employment, benefits, and worker safety products and publications in print, CD, online, and via the Internet.