Besides seasonal bonuses, nonmonetary incentive plans also can boost productivity while decreasing an organization’s bottom line. Following are guidelines to help with incentive compliance.
Stock options: Granting stocks as bonuses is a common nonmonetary reward, particularly when the economy is depressed. Because stock options are considered the employer’s property, they are deductible as wages when provided as payment for services. An employer may deduct the fair market value of the stocks on the date of transfer to the employee, less any amount the employee paid. This deduction is made in the tax year in which the employee reports the stock’s value as income (either the year of transfer or later if there is an agreement between the employer and employee for later vesting). Stock options can motivate employees to work harder as they create an ownership stake in the company.
Achievement awards: Public recognition is a powerful incentive. Recognizing superstar employees through achievement awards is a great way to motivate that employee’s future performance, and also the performance of his or her peers. Prizes, travel, plaques and public commendations are just a few examples of incentives that may qualify as employee achievement awards. Under the federal tax code, an employee achievement award worth up to $400 may be deducted by the employer as a business expense but is not taxable to the employee. The tax code defines an employee achievement award as an item of “tangible personal property” given to an employee for his or her length of service or safety achievement.
While the U.S. Internal Revenue Service approves of incentives for “safety achievement,” be aware that awarding employees for avoiding on-the-job injuries could be interpreted as discouraging employees from reporting injuries, a potential Occupational Safety & Health Administration violation. Instead, the U.S. Labor Department recommends safety achievement awards that promote worker participation in safety-related activities, rather than awarding the absence of reported injuries. These concerns aside, to receive favorable tax treatment, the employee achievement award must be given as part of a “meaningful presentation” and awarded under conditions that suggest it is not “disguised compensation.”
Education benefits: Having a more educated workforce is a benefit for employees and employers alike. Consider paying or reimbursing education expenses as a bonus, which allows an employer to deduct the payments if the costs are part of a qualified educational assistance program. Education expenses may include the costs of books, equipment, fees, supplies and tuition. However, it may not cover the costs of lodging, meals, transportation, supplies that the employee is allowed to keep at the end of the class or tuition for courses involving games, sports or hobbies unless the course bears a reasonable relationship to the business or is required as part of a degree program or tools. To qualify as an educational assistance program: ?
- There must be a separate written plan that benefits employees who qualify under rules set up by the employer that do not favor highly compensated employees.
- The program may not provide more than 5 percent of its benefits during the year to shareholders or owners.
- The program does not allow employees to choose to receive cash or other benefits reportable as gross income. Educational benefits are not only an excellent recruitment and retention tool, but also provide financial benefits to the employee in that they can exclude up to $5,250 of the educational assistance from his or her own wages.
Gift cards and gift certificates: These gifts are a great incentive for employees but may not escape taxation. Unless they qualify as employee achievement awards, gift cards or certificates redeemable for merchandise or cash are taxable as income. Gift cards are taxable because, as an incentive for future performance, the employer is not providing the gift card out of disinterested generosity. There are, however, de minimis gifts (where the value is so small that accounting for it is unreasonable or administratively impracticable) that do not constitute taxable income. Cash can never be a de minimis gift, no matter how small the amount. For example, giving a low-cost theater ticket to an employee may not be taxable, but giving the employee the cash to purchase the ticket would be.
Consult the laws of your jurisdiction for further detail on bonuses, gifts and year-end compensation. To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this article was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding tax-related penalties under the U.S. Internal Revenue Code or promoting, marketing or recommending to another party any tax-related matters addressed herein.