The discussion below is focused on the tax treatment of employee awards. The University has issued guidelines regarding meals, incentive awards, flowers and retirement gifts. University guidelines may be more restrictive than allowed for tax purposes. Please review the University Guidelines in conjunction with the discussion below.
Tax Treatment of Employee Awards
Internal Revenue Code (IRC) section 3401(a) provides the term “wages” means all remuneration for services performed by an employee for his employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash except for statutory exceptions. IRC section 102(c) provides that a gift exclusion from income does not apply to a gift made from an employer to an employee. However, certain non-wage awards can be made to employees either under IRC section 132 or 74.
Under IRC section 132(e), de minimis fringe benefit, an employer can give employee awards of nominal value on a tax free basis. Examples of de minimis fringe benefits under Regulation section 1.132-6 are: occasional typing of personal letters by a company secretary, occasional personal use of an employer’s copying machine, occasional cocktail parties, group meals, or picnics for employees and their guests, traditional birthday or holiday gifts of property with a low fair market value, occasional theater or sporting event tickets, coffee, doughnuts, soft drinks, and local telephone calls, and flowers, fruit, books, or similar property provided to employees under special circumstances (i.e. on account of illness, outstanding performance, or family crisis.) Nominal value gifts under Revenue Ruling 59-58 and IRS publication 535 include turkeys, hams, or other merchandise of nominal value. A retirement gift such as a gold watch is specifically mentioned as a de minimis benefit (PL 99-514). The amount of nominal value is not defined, however, in evaluating the fair market value of the items allowed as de minimus benefits, $75 is a reasonable threshold for nominal value of a non-retirement benefit, see University Guidelines, above for retirement award thresholds. Cash or cash equivalent fringe benefits such as a gift certificate or charge or credit card cannot be given under IRC section 132. Cash, gift certificates or other cash equivalent benefits are additional compensation regardless of the amount or value. (Regulation section 1.132-6(c).)
IRC section 74 provides that non-wage awards can be made to an employee as an employee achievement award. An employee achievement award is tangible personal property. Under this section, a gift certificate can be used provided it is non-negotiable and only confers the right to receive tangible personal property. An employee achievement award must meet the following requirements: (1) it is given for length of service or safety achievement, (2) it is awarded as part of a meaningful presentation, and (3) it is awarded under conditions and circumstances that do not create a significant likelihood of disguised pay. The value of the award cannot be more than $1,600 per year per employee under a qualified employee achievement plan. (The University has a qualified employee achievement plan.) A length of service award cannot be given more often than in 5 year intervals. A safety achievement award cannot be given to a manager, administrator, clerical employee or other professional employee. Also, excluding these categories, not more than 10% of the remaining employees can receive a safety achievement award.
Employee awards not qualifying as excludable under IRC sections 132 or 74 are W-2 earnings and must be reported to Payroll Accounting, by the awarding department, in a timely manner (prior to the close of a month end.)
last updated 11-08