3.12 Employee Achievement Awards

Achievement awards are taxable unless they meet special rules for awards of tangible personal property (such as a watch, television, or golf clubs) given to you in recognition of length of service or safety achievement. Cash awards, gift certificates, and similar items are taxable.

As a general rule, if your employer is allowed to deduct the cost of a tangible personal property award, you are not taxed. The employer’s deduction limit, and therefore the excludable limit for you, is $400 for awards from nonqualified plans and $1,600 for awards from qualified plans or from a combination of qualified and nonqualified plans. If your employer’s deduction is less than the item’s cost, you are taxed on the greater of: (1) the difference between the cost and your employer’s deduction, but no more than the award’s fair market value; or (2) the excess of the item’s fair market value over your employer’s deduction. Deduction tests for achievement awards are discussed in 20.25. Your employer must tell you if the award qualifies for full or partial tax-free treatment.

An award will not be treated as a tax-free safety achievement award if employee safety achievement awards (other than those of de minimis value) during the year have already been granted to more than 10% of employees (not counting managers, administrators, clerical employees, or other professional employees). An award made to a manager, administrator, clerical employee, or other professional employee for safety achievement does not qualify for tax-free treatment.

Caution

Underpriced Award Items

If the value of an achievement award item is disproportionately high compared to the employer’s cost, the IRS may conclude that the award is disguised compensation, in which case the entire value would be taxable.

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Tax-free treatment also does not apply when you receive an award for length of service during the first five years of employment or when you previously received such awards during the last five years, unless the prior award qualified as a de minimis fringe benefit.