Taxation of prizes and awards for employees
Prizes and awards paid to employees are normally includable in an employees’ income and would be subject to all withholdings and payroll taxes. During the holiday seasons many of our clients, as employers, want to pay their employees various types of bonuses and awards. Can any of these prizes and awards be given tax free? The answer is yes – within some narrow guidelines.
Awards that will qualify fall in to three categories:
- Length of service and safety achievement awards
- Awards for civic and charitable work
- Prizes for retail salespeople
Length of service and safety achievement awards:
The award must be not cash or cash equivalent. For an award to be considered non-taxable to the employee it generally must be in the form of tangible personal property. Cash or cash equivalents as well as stocks, bonds, vacations, meals, lodging or tickets to events are not valid for this purpose. The award must be presented in a “meaningful presentation” and not part of disguised compensation.
For a length of service award to be non-taxable the employee must have worked for a t least five years.
For a safety achievement award to be non-taxable it cannot go to managers, professionals or clerical employees. No more than 10% of eligible employees can receive an award in any given year.
If the employer has a written, non-discriminatory plan, the average cost of awards cannot exceed $400 and no one employee can receive more than $1,600. Without a written plan no single award can be greater than $400.
Civic and charitable awards:
These can be in cash or cash equivalent but must meet the following criteria;
- The employee did not solicit the award
- The employee is not required to perform future services to obtain the award
- The employee donates the award to a charity or governmental organization
- The employee may not personally use the award at any time in any way
Prizes for retail salespeople:
An employer paying a noncash award to a retail salesperson, who is paid on a commission basis, can elect not to withhold federal income taxes. The value is still reportable on the employee’s W-2 and will be subject to all other employment related taxes such as social security and unemployment tax. The award is would be given based upon a specific sales quota or in comparison to other salespeople.