Tax Considerations for Recognition and Rewards Programs

July 13, 2016

Implementing recognition and incentive programs requires an awareness of the taxation associated with the awards. While ever-changing federal and state regulations make it difficult to determine the exact requirements that would apply to every recognition initiative, understanding general income tax guidelines will increase the potential for a successful program and, more importantly, avoid unpleasant surprises for both the corporate sponsor and the program participants. This paper outlines the key concepts, based on current practices.

What You Should Know Before You Plan a Program

The General Principle

As you might expect, since awards are given to an employee or associate for work related to their employment or relationship to the company, they are typically taxable as gross income. This applies whether the award is cash-based or in the form of merchandise, gift cards, or travel. According to George B. Delta, Esq., Executive Director and Counsel at the Incentive Federation:

“Prizes and awards are also subject to FICA (social security) and unemployment taxes. If the prize or award is merchandise or travel instead of cash, the Fair Market Value of the item must be included in income. What constitutes Fair Market Value depends on the item and whether it is merchandise or travel.¹ ”

Regulatory Compliance

The Federal Government and most state governments keep a close eye on all earned income, including recognition and anniversary awards. Because most awards are considered compensation, they are taxable. Organizations must carefully monitor these items to avoid tax trouble. While merchandise given as an anniversary or “Years of Service” award may, within specific parameters, be tax exempt, other awards must be included and reported as taxable income on employee paychecks or 1099-MISC annual forms.

Unfortunately, many organizations have non-compliant recognition and incentive programs. It could be a manager with a stack of gift cards in a desk drawer, who doesn’t report the income to HR...

Tax Considerations for Recognition Programs

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