<  Back to all Incentive Program articles

Tax Ramifications of Corporate Incentive Programs

In his article, Primer on the Federal Income Tax Treatment of Incentive Awards, published in January 2000, George Delta, Esq., Tax Advisor to The Incentive Federation, Inc., notes, “There is very little guidance issued by the Internal Revenue Service ("IRS") on employee achievement (incentive) awards.” That said, the purpose of this article is to help clarify some of the complexity regarding the tax ramifications of administering corporate incentive programs.

Employee Achievement Rewards and Tax Exemptions

The Internal Revenue Code, in accordance with the Tax Reform Act of 1986, essentially states that an employer may deduct the value of employee achievement awards given to the same employee in the amount of up to $400.00 in any given year. If the incentive awards are employee achievement awards conferred as part of a formal employee achievement award program, the $400 deduction limitation may be increased to up to $1,600.00 per employee. This effectively means that if your company establishes official corporate incentive programs, you can deduct an award for up to $1,600 for an individual employee achievement award but the average cost per recipient of all employee achievement awards presented during any given tax year cannot exceed $400.00. In addition, if the employer is eligible to deduct the full cost of the award, the employee can exclude the full cost of the award from his or her gross income.

To qualify for this tax break, an incentive award must be an employee achievement award—in other words, it must be an item of "tangible personal property" presented by an employer to an employee for safety achievement or length of service. In addition, the award must be formally presented and cannot be misconstrued as employee compensation.

Items that cannot be considered as “tangible personal property” (and are, therefore, not tax exempt) include: cash, charge or credit cards, gift certificates, as well as travel certificates, vacations, meals, lodging, tickets to theater or sporting events, and stock certificates. To reemphasize, there is a common misconception that gift certificates and debit card awards are tax exempt since they are not technically cash; however, they are, in fact, taxable.

Tax Implications For Years of Service Awards

A years of service award can be excluded from an employee's income if it qualifies as “tangible personal property” (as defined above), is presented by the employer, and is received by the employee after his first five years of service. In addition, a length of service award can only be excluded if the employee has not received another length of service award from the employer for at least five years.

Gifts With Company Logos

Gifts with company logos valued at under $4.00 are tax exempt. However, any gift exceeding $4.00 in value, whether it has a logo or not, is taxable.

Employee Recognition or Performance Programs and Taxes

The Tax Reform Act of 1986 clearly excludes employee recognition and performance or productivity programs from tax exemption. Specifically, the Internal Revenue Code states that in order for an incentive award to qualify for tax exempt status, it must be given to employees for safety, achievement, or length of service only.

Note: If your company is sponsoring corporate incentive programs or employee achievement programs, you should consult with your tax attorney for professional tax advice. This article is not intended as a substitute for a legal tax consultation.

 

Incentives Marketplace is a performance improvement company devoted to providing clients with a single source for high quality, affordable incentives designed to achieve business goals.

Contact us today with your specific needs and put our incentive programs and experienced staff to work for you! Call 800-934-5474 or send e-mail to: Info@IncentivesMarketplace.com.

<  Back to all Incentive Program articles