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Are Your Employee Recognition Awards Taxable?

Employee recognition awards come in all shapes and sizes. Sometimes it’s a plaque on the wall or a trophy for their desk. Other time’s it’s a gift card to a nice restaurant in town, or maybe even an extra day of paid vacation time. And sometimes it’s plain, cold hard cash. But when your employee recognition system is based on monetary compensation businesses have to realize that the IRS is very interested in how that money is being awarded.

Here are a few things you need to know about monetary-based employee recognition awards that the IRS takes into account:

Is that award part of the regular compensation plan?

According to the IRS, a “highly compensated employee” is an employee that owns 5% of the company or is among the top 20% of employees in the company in terms of total compensation. Assuming your employee recognition plan does not favor highly compensated employees, you can deduct up to $1,600 of these awards per employee per year as non-wage business expenses. Monetary awards given to “highly compensated employees,” like a VP of Sales or member of the C-suite, might not be deductible so be sure to check with your accounting team!

Length-of-service awards are tax-deductible.

“Length-of-service awards for five years or longer are tax-exempt as long as you have not rewarded the employee for length of service in previous years, and as long as it is awarded during a presentation.” If you want to reward an employee for their long term commitment to your company with a special bonus be sure you do so in a public setting! Some employees are shy about company-wide recognition, but celebrating ten years with the company deserves a little bit of a party!

Cash awards are taxable, so maybe consider another kind of recognition award.

"Amber Blaze" Recognition Award

"Amber Blaze" Recognition Award

Cash awards or cash equivalents are taxable awards. The only exception to this is if the award is a de minimis award, meaning that the amount is so small that it would be unreasonable to track such an award. There is no set dollar amount for a de minimis award, although the IRS has stated that it considers a measly $100 to be too much for de minimis. Instead of offering a cash reward why not give your employee an extra paid vacation day or two over the summer. The time off might mean a lot more to them than any monetary award would anyway.

You could also host a company-wide recognition ceremony and treat the entire staff to a nice catered lunch or dinner, or take everyone off-site for a fun company trip and hand out custom designed recognition awards to employees.