Tuesday, January 22, 2013

Tax Break for Employee Achievement Awards

The Internal Revenue Code contains the answer to everyone's question of whether employee achievement awards should be considered taxable income.  The answer is way more complicated than it should be.

If the award is an item awarded for "length of service" or "safety achievement," the award can generally cost up to $1,600 and not be considered taxable income to the employee.  Nearly all other awards result in taxable income, unless the value of the item is minimal.

A taxable award.
Employee achievement awards were apparently a hotbed of tax evasion in earlier years, because the Internal Revenue Code requires for tax-free awards that:
1. The length-of-service or safety-achievement awards must be "awarded as part of a meaningful presentation,"
2. A length-of-service award cannot be given to someone who has worked for less than five years,
3. An employee cannot receive a length-of-service award more than once every five years,
4. The award is not in the form of cash, vacations, meals, lodging, tickets to theater and sporting events, or stocks, bonds, and other securities.
5. The $1,600 cap applies to all awards received by a single employee during the year,
6. Tax-free safety achievement awards cannot be given to a manager, administrator, clerical worker, or other professional employee,
7. Safety achievement awards cannot be given to more than 10% of all the company's employees in a single year,
8. Safety achievement awards must be given to full-time employees who have worked for at least one year.
9. The award's circumstances cannot create a significant likelihood that it is being used as disguised compensation, such as giving the "award" around the time of annual bonuses,
10. If the award discriminates in favor of highly compensated employees who make more than $115,000 a year, the $1,600 cap is reduced to $400 per employee, and
11. There are maximum limitations on the average cost of all employee achievement awards.

From 1981 to 1986, employee achievement awards could also be given for "productivity," but Congress eliminated that category for an unknown reason.

No comments:

Post a Comment