Taxation Of Gifts, Prizes, Bonuses and AwardsHR Resource
May 21, 2012 — 2,529 views
Offering gifts, prizes, awards and other incentives to employees is a great way to show your appreciation for all their hard work and boost company morale. Providing these items is also a popular and inexpensive way to cut costs in terms of employee benefits. However, it's important to understand how the taxation of these items works, so you are not left with unexpected and unwanted consequences.
Any form of cash-equivalent compensation that is given to an employee in addition to their stated pay is considered a fringe benefit as stated in the Internal Revenue Code of the Internal Revenue Service (IRS). Therefore, it's essential to know how to properly claim these items for taxation.
According to George Washington University, cash gifts, prizes and bonuses are considered supplemental wages and can always be reported as taxable compensation. If the gift is valued at around $100 or less, is a non-cash gift such as flowers or food or if it is only given occasionally, it may be considered non-taxable compensation to the employee. This is because these items, of minimal cash value, fall under the IRS de minimis rule. It's important to note that gift cards redeemable for cash are not included under the de minimis rule.
To find out the exact amount that is considered minimal, consult your tax advisor. IMBC Employment Partners, LLC explains that gifts deemed as tangible personal property may also not be taxable. Your tax advisor can also offer precise guidelines on what is considered tangible personal property for your company as the definition is not clear across the board.
Gifts or prizes valued at more than $100 must be processed through payroll services and are taxable and therefore subject to state, federal and employment tax withholding, explains IMBC. Furthermore, the gifts or bonuses must be included in the employee's W-2 Form, Wage and Tax Statement. When giving gifts or bonuses to employees, it is prudent to explain the tax implications up front, so an employee is not taken by surprise later when federal and state taxes are withheld by payroll.
The taxation of gifts, awards and bonuses is a complicated topic for both employers and employees. The many regulations and exemptions set forth by the IRS often require a professional tax advisor to aid in reporting all fringe benefits. As an employer, it may be prudent to attend a seminar or webinar on the taxation of fringe benefits so you are able to best explain the process to employees and ensure you are not surprised by tax consequences in the future.