How are Rewards Programs Taxed?
Taxes aren’t the exciting part of incentive and rewards. And they certainly aren’t the first thing you consider when you’re putting together a program. But the reality is that, for your participant, the proper handling of taxation can have a significant impact on their reward experience.
Many of our clients ask for help in navigating the tax implications for their incentive and recognition programs so, based on our many years of experience, we have published a white paper which covers many common questions.
Are any Recognition Awards Exempt?
Since rewards are typically associated with employment, they are often subject to income tax, FICA, and social security withholding. And, particularly for your top sales performers, the taxes associated with rewards can be significant. As you build your program, two particular events receive special consideration:
- Years of Service awards have certain exemptions based on frequency and value
- Safety awards are subject to exceptions up to $400/yr, depending on the role of the recipient, and the type of action involved
It should also be noted that the type of reward can also impact the tax treatment. According to current IRS guidelines “to be exempt, tangible personal property awards cannot be in the form of cash, check, credit/debit cards, gift certificates, meals, lodging, event tickets and stock certificates or other securities.”
This naturally leads to the requirement for any rewards program to be able to differentiate between the various classes of rewards, and to report the redemption of Years of Service and Safety rewards separately from other awards. Assuming that the rewards are on a points-based platform, a report of Fair Market Value (FMV) will also be required to administer the program effectively.
For more information, including tax reporting requirements and an explanation of “grossing-up,” read Tax Considerations for Recognition and Rewards Programs.
Please note that taxation is a complex, and constantly changing, subject, and professional advice should always be sought before making any decisions. Dittman Incentive Marketing does not provide tax, legal or accounting advice.