Gifts/Awards

Taxation of Employee Gifts and Service Awards

GENERAL

The Internal Revenue Service rule for employee recognition payments, awards, and prizes provides that "de minimus" fringe benefits are not included in gross taxable income. Treasury Regulations 1.132-6(e)(1) cites "flowers, fruit, books, or similar property provided to employees under special circumstances (e.g., illness, outstanding performance, or family crisis) as examples of non-taxable "de minimus" fringe benefits.  What many employers may not realize, however, is that many of their gifts to employees are considered compensation by the Internal Revenue Service and are subject to federal and state income taxes as well as Social Security taxes.  Any cash that is given to an employee at any time must be added to the employee’s W-2 income.  An appropriate administrator should be responsible for ensuring that award and gift programs at different levels within the District comply with IRS reporting requirements.

Employee Gifts - Cash or Cash Equivalents

Gift cards, Certificates, cash, use of credit or charge cards, and other cash equivalents are taxable income regardless of value.  A "cash equivalent" is any means such as a gift certificate or the use of a credit card that allows purchase of a product or service as if cash were being used. Any cash you give to an employee at any time - whether it's a salary, bonus, holiday gift, or safety award - must be added to the employee W-2 income.  As a cash equivalent, a $10 gift certificate to buy a turkey or a $10 bonus for perfect attendance is $10 of taxable income.  But many small-business owners don't know they are breaking the law by not reporting the cash-equivalent value of holiday gift certificates as taxable employee income.  Performance-based awards or bonuses that are generally taxable to the recipient should processed through Payroll. As a result of the taxable status of gift cards, we will no longer allow giving gift cards to employees.

Employee Gifts - Non-Cash Gifts of Personal Property

Now let's talk turkey.  In general, you can hand out a turkey or a ham and not be required to include the value in the employee W-2 income, because a turkey is "tangible personal property" that has a nominal value.  But if you give each employee a $10 gift certificate to purchase a turkey at a grocery store, your gift of a "cash equivalent" no longer qualifies as a de minimus fringe benefit.  If you want to give your employees a turkey for Christmas, you probably don't want to pass out 100 frozen turkeys during the festivities at a nice restaurant.  The suggestion is that the employer issue "nonnegotiable" certificates to employees that include the employee's name, the grocery store, and the name of the item.  Whatever you do, don't put a dollar amount on the face of the certificate, don't allow your employees to choose what they want to buy, and don't let employees exchange the gift certificates for cash or get cash back.  As soon as you put the $10 on the certificate, you fail the “administratively impractical” requirement for a de minimus fringe benefit.  If you know the value is $10, you must add the $10 to the employee's income.  Flowers, books, fruit baskets or other similar items are not taxable.

1. Dollar Limit - The aggregate gift value should not exceed $25 per individual.  If the value of the gift(s) exceeds $25, then the entire gift will be taxable.
    

2. Frequency - The gift should be given only on an occasional basis.  Gifts given to an employee(s) on a regular or routine basis do not qualify for nontaxable treatment and must be reported as taxable income.
    

Employee Achievement Awards

The tax rule on service awards allows employers to give employees "achievement awards" that are not taxable in honor of employment anniversaries in increments of five years (for example, after five, 10, or 50 years of service) or safety awards that are not given to more than 10 percent of the company's employees in any year.  As with the de minimus rules, the award cannot be cash or a cash equivalent, and any award that does not qualify as an employee achievement award must be added to the employee's income.  IRS regulations, however, would allow an employee achievement award to consist of a nonnegotiable certificate.  This certificate entitles the person to receive only specific tangible personal property.  However, a person with five years of service in a company could probably choose one item from a very limited selection of nominally valued awards, such as a key chain or a pocket knife.  Just be aware that entitling an employee to receive an item is not the same as letting an employee choose an item.  A gift certificate to purchase any item in a store or catalog is still a cash equivalent that is taxable income to the employee.

Recognition of Special Effort or Outstanding Performance - Non-cash awards, such as plaques, certificates (not cash), books, flowers or similar items are not taxable if they are $100 or less.  An employee may only receive these awards twice in one calendar year to be considered non-taxable.

Length of Service Awards - These awards must be part of a meaningful presentation and given to an employee no more than once every five (5) years.  Non-cash awards of $400 or less are not taxable.

Safety Awards - Non-cash awards (up to $400) given to employees directly involved are not taxable.  Any safety awards given to managers, administrators, other professional employees or clerical staff not directly involved with the safety performance will be fully taxable.

Retirement Awards - Retirement gifts may be excluded from income if the dollar amount of the gift relates to the retiree's length of service.  Documentation is to be provided describing the relationship between the retiree's length of service and the value of the gift.

1.  Timing - The length-of-service/retirement award may not be made within the employee's first five years of service or more frequently than every five years.  Length-of-service and/or retirement awards given other than the minimum timing or more often than the 5-year interval will be taxable in full and must be reported.
    

2.  Dollar Limit - The value or cost of the award should not exceed $400.  Also, it is recommended that the value or cost of the award be commensurate with the number of years of service being recognized (e.g., the 15-year service award is greater than the 10-year service award).  Length-of-service or retirement awards with a value or cost over $400 will be taxable to the extent the value or cost exceeds the dollar limit (e.g., if a $450 award is given, then $50 will be taxable).  If the staff employee elects to retire the same year he/she becomes eligible for a length-of-service award, then the maximum value or cost of the award(s) should not exceed $400 for the award(s) to be nontaxable.
    

3. Form of Awards - The award must be in the form of tangible personal property.  If a gift certificate is given, then it should be one that requires the recipient to purchase or exchange the certificate for tangible personal property or service from the issuing vendor.  It cannot be a gift certificate that is convertible to cash or used to reduce the balance of the recipient's account with the company issuing the gift certificate.  If the award is in the form of cash, check, or items that can be easily converted to cash, the value of such items is treated as additional wages regardless of cost or value.
    

4.  Meaningful Presentation - The award must be presented as part of a special event or celebration that marks the occasion, such as a departmental meeting, party, or luncheon.  Every attempt should be made to give a length-of-service/retirement award during the year the anniversary occurs.  To avoid tax liabilities to the attendees, departments or schools should ensure that special presentation events are conducted only on an occasional basis and that the costs of the events are reasonable.

Administrative Regulation CFD-R (Local) Accounting: Activity Funds Management addresses gifts and awards to employees.

GIFTS

 “Activity funds may not be used to purchase gifts for students or employees. A gift is a gratuitous offering for personal benefit that does not serve a legitimate educational interest. For example, birthday presents, or presents and acknowledgments for other personal occasions are considered gifts. Employees and students may, however, donate personal funds to be applied toward the purchase of a gift.”

If a book or some other educational related merchandise is purchased for an employee, it is not considered a personal gift and thus can be purchased with activity funds.  According to the IRS, these items may not exceed $25 per person.

RECOGNITION OF SPECIAL EFFORT OR OUTSTANDING PERFORMANCE OR INCENTIVE AWARDS:  Employees and Students

“Incentive programs are permissible as long as they are designated to achieve a legitimate educational benefit. For example, programs designed to address a situation negatively affecting the educational program, such as teacher or student absenteeism, employee turnover, or poor reading skills, may be conducted and campus activity funds may be used to purchase incentive awards in connection with such programs. Incentive awards cannot be cash or readily converted into cash (e.g., savings bonds, money orders, refundable tickets or gift certificates redeemable in cash, etc.). Incentive awards shall not exceed a value of $100 per person per school year unless the principal obtains written approval to do so from the Superintendent or his/her designee.”

According to the IRS these awards for recognition must be non-cash awards, such as plaques, gift certificates, spirit shirts, books, flowers or similar items and must be less than $100 per person.  An employee may only receive these awards twice in one calendar year to be considered non-taxable.

In giving gifts and awards to your employees with activity funds, proper discretion should be exercised as these are school district funds and subject to public scrutiny.

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Last modified: 07/12/07