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HR MATTERS E-TIPS
THIS WEEK’S E-TIP: Tax status of Employer Awards and Gifts Q&A
Published by Personnel Policy Service, Inc.
"Your Policy and Compliance Experts Since 1972"
 
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THIS WEEK’S E-TIP: Tax Status of Employer Awards and Gifts Q&A

Do you know when you (and your employees) have to treat awards and
gifts as taxable income? Find out when these items may be excluded
from pay.
 
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THIS WEEK’S E-TIP: Tax Status of Employer Awards and Gifts Q&A

Q: We are planning to implement a recognition program that will
provide awards for things such as years of service and performance and
allow us to acknowledge employees on special occasions, such as
birthdays and holidays. We would like to have the option of providing
either tangible award items (such as the traditional “gold watch” at
retirement) or gift certificates. Are these awards taxable?

A: Service awards generally are deductible from the employer’s
taxes and will not be considered taxable income to the employee if they
are tangible personal property and meet certain criteria, discussed
below. Any other recognition award typically is considered taxable
income to the employee, unless it meets the “de minimis” standard.
Further, cash and gift certificates are always considered taxable income.
(Download free Employee Recognition and Service Awards model
policy
.)

Regarding service awards, the Internal Revenue Code generally allows
employers to deduct the cost of an item of tangible personal property
which is: (1) awarded to an employee by reason of length of service; (2)
awarded as part of a meaningful presentation; and (3) not likely to be
disguised compensation. You cannot, however, take a deduction for
items that the employee receives: (1) during the first five years of
employment; or (2) after the employee received a prior length of service
award in that year or any of the prior four years (except when the value
of the items was of so little value that accounting for them was
unreasonable or administratively impossible). See 26 U.S.C. §§132(e)
and 274(j)(4)(B).

The amount that you may deduct for service awards to individual
employees during the taxable year depends on whether the awards are
“qualified plan” awards. The term “qualified plan award” means an item
awarded as part of an employer’s established, written plan or program
which does not discriminate in favor of highly compensated employees
as to eligibility or benefits. See 26 U.S.C. §§274(j)(3)(B) and 414(q)(1).
An employer may take a deduction of up to $1,600 for “qualified plan”
awards made to an individual employee during the taxable year. The
$1,600 limit includes awards given for length of service or safety
achievement to that employee during the taxable year (including those
which are not qualified plan awards). See 26 U.S.C. §274(j)(2)(B).

You should note that achievement awards will not be treated as
“qualified plan” awards if the average cost of all employee achievement
awards provided by the employer during the year exceeds $400
(excluding those of nominal value). See 26 U.S.C. §274(j)(3)(B)(ii). For
awards that are not “qualified plan” awards, you may deduct a total of
$400 (including achievement awards that are not “qualified plan” awards)
made to the individual employee during the taxable year. See 26 U.S.C.
§274(j)(2)(A).
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Length of service awards are excluded from an employee’s gross taxable
income to the extent they are deductible by the employer. See 26 U.S.C.
§74(c). If the cost to the employer exceeds the deductible limit, you must
include in gross income the greater of: (1) the portion of the employer’s
cost that is not deductible; or (2) the amount by which the fair market
value exceeds the maximum employer deduction. See 26 U.S.C.
§74(c)(2).

Note that cash given as a service award is not considered “tangible
personal property” and therefore is treated as compensation to the
employee. See 26 C.F.R. §1.274-3(b)(2).

Any other employee recognition award generally should be treated as
taxable income to the employee, unless it meets the “de minimis”
standard for exclusion because the award is of such a small value that
accounting for it is administratively impracticable. See 26 U.S.C.
§132(e). Again, the provision of cash to an employee is not excludable
as a de minimis benefit. See 26 C.F.R. §1.132-6(c).

In addition, a cash equivalent benefit, like a gift certificate or gift card,
generally is not excludable even if the same property or service (if
provided in kind) would be excludable as a de minimis fringe benefit.
See 26 C.F.R. §1.132-6(c). Specifically, the IRS regulation states “a
cash equivalent fringe benefit (such as a fringe benefit provided to an
employee through the use of a gift certificate or charge or credit card) is
generally not excludable under section 132(a) even if the same property
or service acquired (if provided in kind) would be excludable as a de
minimis fringe benefit.”

So, for example, a $25 gift card would be taxable while the gift of a
turkey or ham would not be. Similarly, other small, infrequent tangible
gifts such as fruit baskets, theater or sporting event tickets, and group
meals typically are not considered taxable. (Download free Employee
Recognition and Service Awards model policy
.)

The IRS provides information on the tax aspects of employer-provided
fringe benefits in its “Employer’s Tax Guide to Fringe Benefits,” available
online at http://www.irs.gov/pub/irs-pdf/p15b.pdf.

Because of the complexity of the tax issues, you should take extra care,
including consulting with a tax expert, before taking action on these
topics.
 
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Subscribers to the Personnel Policy Manual (print/online) and HR Policy Answers on
CD can find information on the tax implications of employer awards
and gifts in Employee Recognition and Service Awards, Chapter 507,
note 7.

Not a subscriber? If you would like to order one of our policy chapters,
go to: http://www.hrpolicyanswers.com.

If you have any questions, please call us at 1-800-437-3735. We'll be happy to help you.
 
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Information provided in HR Matters E-Tips is researched and reviewed
by the HR experts at Personnel Policy Service as well as employment
law attorneys. However, it is not intended as legal advice. Readers are
encouraged to seek appropriate legal or other professional advice.

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