In production-based work environments, it's common for employers to use contests, raffles, gifts, prizes and "spiffs" to motivate performance, attendance, and other positive performance standards.
In the past, employers could deduct the cost of certain employee prizes and gifts, known as "achievement awards." These achievement awards were often excludible from employee income (i.e., not taxed).
Not so fast says Uncle Sam! Under the Tax Cuts and Jobs Act, there is an IRS prohibition on cash, gift cards, and other non-tangible personal property being given as "employee achievement awards" deductible for employers and excludable from employee income.
Special rules still allow an employee to exclude certain achievement awards from their wages if the awards are "tangible" (i.e., physical) items such as commemorative plaques, watches, rings, or pens, including items the employee chooses from a catalog.
The Act clarifies that "tangible" personal property does not include cash, cash equivalents, gift cards, gift coupons, certain gift certificates, tickets to theater or sporting events, vacations, meals, lodging, stocks, bonds, securities, and other similar cash-equivalent items. Cash and cash-equivalents (e.g., gift cards) given to employees are compensation subject to regular withholdings.
The Employer's Supplemental Tax Guide published by the IRS for 2019, which can be found here, reminds employers that to be excludable from an employee's taxable gross income, an achievement award must be given to an employee for a length-of-service or safety achievement.
Employers can still deduct employee achievement awards as business expenses, so long as the awards meet the new requirements. Employers may generally deduct up to $400 per employee per year, subject to IRS rules. Also, employers may still provide employees small ("de minimis") gifts without regular withholdings, including fruit baskets, flowers, coffee, snacks, and holiday gifts.
Now is the time to review your contests, raffles, gifts, and incentives to ensure compliance.► Back to News & Resources