What Awards are Excludable from Tax?

Awards given to an employee are typically taxable as gross income. There are, however, three exceptions to this general principle that exclude non-cash awards

We are committed to providing best in class solutions to make employee recognition more rewarding. In the process, we are glad to help eliminate unnecessary costs and simplifying the recognition process.

There are three types of non-cash awards that may be excluded from tax (subject to dollar limitations, discussed below). The three excludable non-cash awards are:

Certain prizes or awards transferred to charities and donations
De-minimis awards and prizes
Certain employee achievement awards (service anniversary / length of service and safety awards)

Each type of excludable award has specific requirements that must be met to be excludable from tax. This document further describes employee achievement awards. An employee achievement award is an item of tangible personal property (not cash) for length-of-service or safety. Our program for employee achievement awards can be offered in compliance with the following requirements, so that the awards are excludable from tax: I.R.C. § 274(j)(3)(A)(i))

To be excludable, the award:
(a) must be given for service anniversary or safety;
(b) must be awarded as part of a meaningful presentation; and
(c) cannot be disguised wages or made under conditions and circumstances that create a significant likelihood that it is disguised wages.
To be qualified: R.C. § 274(j)(3)(B)
(a) the award must be made under an established written plan;
(b) the plan may not discriminate in favor of highly compensated employees (generally, for 2020, those whose compensation exceeds $130,000); and
(c) the average cost of all employee achievement awards (both qualified and nonqualified awards for length-of-service and safety) made by the employer during a single year may not exceed $1,600 (including up to $400 for awards that aren’t qualified plan awards).

Service Anniversary Program using the Merchandise Catalog

The following is a high-level guide to launching a qualified service anniversary program that can be excluded from income:

Implementation Instructions

The company creates and documents a written length-of-service plan to ensure their organization follows a “qualified plan award”
The company defines and implements a service anniversary program in JobPts
The company pre-selects and approves an array of merchandise items the employees can redeem from Amazon or eBay in the JobPts redemption catalog

Post Go-Live Instructions (Example)

The employee reaches a 5-year work anniversary for the company on January 1, 2022. The employee didn’t receive another service award excluded from income in any of the prior 4 years.
Weeks and days prior to the employee’s work anniversary, colleagues of the employee write a meaningful note of appreciation using the software application in JobPts. The comments are held in a queue and will be sent to the employee on his work anniversary date.
On Jan 1, 2022, the employee receives all the messages, plus gets a digital presentation for this "moment that matters" with all the notes emailed to him/her.
On Jan 1, 2022, the company also gives the employee a $200 USD budget to redeem tangible gift(s) that have been pre-approved by the company.
The automated email for the service anniversary also clearly instructs the employee for redeeming these points they should use the merchandise catalog in order to exclude payable taxes
The employee redeems 200 points for new watch = $200 USD.

Why would the employee gifts not be included as income?

The employer has a written length-of-service award policy
The employer did not discriminate in favor of highly compensated employees
The employer awarded less than $1,600 for a qualified length-of-service award program
The award was given as part of a length of service achievement award and the award was for a service award greater than five years.
The employee did not receive an achievement award that was excluded from income in the previous four years.
The employer used a software application with JobPts to create a limited array of tangible personal property for the achievement award. The employer selected and pre-approved the vendor Amazon or eBay.
Items awarded were for tangible personal property and not cash or gift cards.
Award was given as part of a meaningful presentation that was delivered electronically via JobPts.

With a points program can I combine a service anniversary program with a monetary program and still receive the taxable benefits?

Often an organization is running multiple recognition programs. An example would be an employee received $150 worth of points in a monetary program, and then an additional $200 in a service anniversary award program. The total amount of points the employee can redeem is $350. This begs the question, can the employee combine the points to get something of greater value as merchandise, and the item not to count as income to the employee?

The IRS does not specify this type of situation, but in the 2020 Fringe Benefits Guidelines page 47 the IRS provides multiple examples where one can deduct the service anniversary dollar limitation to stay within the IRS guidelines. We provide organizations a way to export the data to help follow the guidelines the IRS has provided for qualified award programs.

Prizes or Awards Transferred to Charities

Certain prizes and awards given in recognition of charitable, scientific, artistic or educational achievement are not taxable if the recipient transfers them to a charitable organization according to IRC Section 74(b)

The following requirements must apply for a transferred award to be excludable from wages:

Award is for achievement.
Recipient is selected without entering any contest.
No substantial future services are required.
Recipient transfers the award to a charitable organization recognized under IRC 170(c) prior to receiving the benefit.

DISCLAIMER & REFERENCES:

The information contained herein is not legal or tax advice and is not intended to be used, and cannot be used, for purposes of avoiding tax penalties or tax. The information contained herein is general in nature and contains the opinions and conclusions of Semos Cloud only. We assume no obligation or responsibility to inform the reader of any changes in tax laws or other factors that could affect information contained herein. Before making any decision based on this information you should consult with the appropriate legal or tax advisor.

If this article left your questions unanswered, please submit a Support Form, and we can clarify this topic.