Simplifying Tax Considerations For Employee Recognition Programs

When running an effective employee recognition program, understanding tax implications is crucial. While this article offers helpful insights, it does not serve as formal tax or legal advice. Always consult with a tax professional for your specific circumstances.

These tips are based on Internal Revenue tax code Internal Revenue Code Section 274(j)(3)(B), I.R.C. § 274(j)(3)(A)(i)) and IRS Fringe Benefits Guidelines.

General Tax Principles

Recognition awards tied to an employee’s service or achievements are often considered taxable income. This means that employers should factor in tax obligations when designing their programs. However, there are certain exceptions that allow non-cash awards to be tax-exempt if specific conditions are met. 

Let’s explore these exceptions and how you can leverage them to maximize the benefits of your employee recognition initiatives.

When Awards May Be Tax-Exempt

Non-cash awards can qualify for tax exemptions under these three categories:

1. Employee Achievement Awards. Specifically for length-of-service or safety recognition.
2. Awards Transferred to Charities. Prizes or awards donated to charitable causes.
3. De Minimis Awards: Small, low-value awards or prizes.

In this article, we’ll focus on employee recognition awards and how they can comply with tax guidelines.

Employee Achievement Awards: Key Criteria

To qualify as tax-exempt, achievement awards must meet these conditions:

1. Purpose. The award must be for length-of-service or safety achievements.
2. Meaningful Presentation. The award should be given in a way that recognizes the employee’s contribution.
3. Tangible Property. The award must be a physical item (e.g., gifts) and not cash or cash equivalents like gift cards.

Additionally, awards must adhere to these requirements to be considered a qualified award:

• The program should follow a written, established plan.
• It must not favor highly compensated employees (e.g., those earning over $130,000).
• The annual average cost of such awards per employee must not exceed $1,600 for qualified plans or $400 for non-qualified plans.

What Does Not Qualify As Tangible Property?

The Tax Cuts and Jobs Act of 2017 clarified that certain items do not count as tangible personal property. These include:

• Cash, gift cards, or certificates (unless restricted to pre-approved tangible goods).
• Tickets to events, vacations, stocks, or bonds.

Abundantly’s platform makes it easy to comply with these rules by enabling employers to pre-select tangible goods for awards. For instance, you can create a catalog of approved items that align with tax-exemption guidelines.

Designing A Length-Of-Service Program With Abundantly

Here’s a step-by-step guide to creating a compliant length-of-service recognition program:

1. Plan and Document. Start with a written plan outlining your award criteria and processes.
2. Pre-Select Rewards. Use Abundantly’s platform to curate a selection of tangible gifts, ensuring compliance with tax regulations.
3. Meaningful Recognition. Celebrate milestones through meaningful presentations, such as digital or in-person ceremonies.
4. Track Costs. Monitor the fair market value (FMV) of redeemed items to ensure awards remain within annual limits.

Example Program In Action

Let’s say an employee reaches their 5-year work anniversary:

• Pre-Celebration. Colleagues submit messages of appreciation via Abundantly’s platform.
• Award Presentation. On the anniversary, the employee receives these messages along with an approved tangible gift valued at $200.
• Tax Compliance. Since the award is part of a length-of-service program and meets the guidelines, it can qualify for tax exemption.

Combining Recognition Programs

If you run multiple recognition initiatives (e.g., length-of-service and performance-based rewards), tracking is essential. For instance:

• An employee redeems a $329 blender using a $200 length-of-service award and $150 in performance points.
• Only $200 is tax-exempt. The remaining $129 is taxable income.

Abundantly’s reporting tools make it easy to navigate these scenarios and stay compliant.

Simplify Recognition With Abundantly

Abundantly simplifies employee recognition while ensuring compliance with tax guidelines. Our platform empowers organizations to design meaningful, tax-efficient recognition programs that align with their values and goals.

For more detailed guidance, consult with your tax advisor or book a demo with Abundantly today to streamline your recognition efforts.