The simple answer is that it depends on the type of employee recognition award. Per the Internal Revenue Service (IRS), awards can generally be deducted, whether they are given in the form of cash or property. They are considered ordinary business expenses, but there are qualifications and limits that some must meet to be deductible.
Let’s break it down by the type of award.
Achievement awards are a great way to recognize your team members for the work that they have done and drive employee engagement.
For tax purposes, these are deductible to your business so long as they are tangible personal property, given as part of a meaningful presentation, and don’t create the probability of being disguised pay, which is taxable.
It’s important to note what a piece of tangible personal property is as it pertains to employee awards. The following are not tangible personal property:
So, what is tangible personal property? By definition, it is something owned by an individual or business that is not a piece of land or business. An item such as a plaque, trophy, or watch would be considered tangible personal property.
Suggestion programs are often used to encourage employees to suggest innovative ideas that can improve your business. Oftentimes, companies will reward the employee with the best suggestion.
Like others, this type of award must meet conditions to be considered deductible. The awarded suggestion cannot be part of an employee’s job, nor can the award be based on salary.
Also called milestone awards, service awards, service milestones, and employee anniversaries, these awards recognize an employee’s years of service. These are typically given at the 5-, 10-, 15-, and 20+-year marks.
These are all deductible but must meet certain criteria. To qualify, they should not be given within an employee’s first five years of employment. In addition, an employee cannot have received a length-of-service award during the same year or the previous four years (though one of very small value is okay).
Likewise, safety awards have their own standards to meet in order to be deductible. Per IRS conditions, these awards cannot favor managers, administrators, clerical employees, or other professional employees. In addition, you cannot have granted a safety achievement award to more than 10% of your employees (other than one of very small value).
Should you choose to award your employees with a bonus, it’s important to understand the tax implications of doing so.
Because cash or cash equivalents are not considered tangible personal property (see above), a bonus is not deductible and is a taxable event if given as an award. Bonuses paid to employees as additional pay for services are generally deductible and must be considered reasonable for services performed.
Like most deductions, employee awards have limits as well.
The deduction for the cost of awards given to any one employee during a tax year is limited to:
What is the difference between qualified and non-qualified plans? An award falls into the non-qualified category if the average cost of achievement awards given during the tax year is more than $400.
A qualified plan award is given as part of an established plan that does not favor highly compensated employees. Employees who fall under the “highly compensated” category were 5% owners at any time during the previous year or make more than $125,000 (unless they are not in the top 20% of earners).
Rewarding your team with high-quality awards that are affordable and tax-deductible is an important part of doing business, both for you and your employees. At Acrylic Warehouse, we specialize in tax-deductible gifts and awards, including lucite entrapments, corporate awards, and custom acrylic cutout awards.
Get in touch with our expert team of Recognition Specialists today to help find the best award for your program.