Did you know that employee incentives can be taxable? 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.
Since awards are given to an employee or associate for work related to their employment or relationship to the company, they are typically taxable as gross income. There are, however, three exceptions to this general principle that exclude non-cash awards from tax.
There are three types of non-cash awards that may be excluded from tax. The three excludable non-cash awards are:
1. Certain employee achievement awards (length-or-service and safety awards).
2. Certain prizes or awards transferred to charities.
3. De-minimis awards and prizes
Exclusion from Wages
You can generally exclude the value of achievement awards you give to an employee from the employee’s wages if their cost isn’t more than the amount you can deduct as a business expense for the year. The excludable annual amount is $1,600 ($400 for awards that aren’t “qualified plan awards”).
If the cost of awards given to an employee is more than your allowable deduction, include in the employee’s wages the amount over the cost of your allowable deduction (up to the value of the awards).
$1720 Annual Achievement Award
– $1600 Excludable Annual Amount
$120 Taxable Income to the Employee