It’s that festive time of year again, and many business owners are giving members of their workforce a holiday bonus! Whether you are the business owner giving a bonus or award, or you are the recipient of it, it’s important to know and understand the tax liabilities. Toward that end, please note the following guidelines.
• Monetary prizes, awards, bonuses, and gift certificates are generally considered taxable compensation. • Prizes, bonuses, and awards that involve goods or services, such as a trip/vacation for a meeting a sales goal, also generally result in taxable income. • “Tangible personal property” awarded to employees may not be taxable an achievement award program (see below). • Awards and gifts of minimal value, such as a holiday turkey, generally fall under the IRS’s de minimis rule and are not taxable. The IRS may allow up to a $25 annual deduction. • The value of holiday gifts, such as merchandise or tickets to sporting events, in excess of the de minimis amount is taxable income.
In some cases, the value of employee achievement awards can be excluded from taxable income. However, the award must involve something other than cash, a gift certificate, or other cash-equivalent item, and must be given for a length-of-service or safety achievement. The amount that an employee can receive tax free is limited to the employer’s cost and cannot exceed $1,600 ($400 for awards that are not qualified plan awards) for all awards the employee receives during the year (IRS Publication 535).
In addition, the employer must make the award as part of a meaningful presentation. The tax-free employee achievement award exception does NOT apply if:
• The length-of-service award is for less than five (5) years of service or if the employee received another length-of-service award during the year or the previous four (4) years. • The safety achievement award is given to a manager, administrator, clerical employee, or other professional employee. • More than 10% of eligible employees previously received safety achievement awards during the year.
Please reach out to your accounting professional at Zinman & Company for more information, clarification, or with any questions.
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