Year-end gifts to employees
This is the time of the year when many employers give deserving employees a reward for a job well done, or acknowledge a good working record. The year-end also brings the time to potentially say goodbye to long-time workers who are retiring. Did you know that some of these awards might be taxable?
Did you know this also could be the last year to take advantage of employee achievement awards? The House-passed Tax Cuts and Jobs Act would repeal the exclusion of employee achievement awards, effective for tax years beginning after Dec. 31, 2017.
The following discussion shows what should be included in an employee’s income and what should not.
De minimis fringe benefits: For payroll and income tax withholding purposes, employee wages don’t include any benefit provided to the employee if the benefit is excludable from his or her gross income under Code Sec. 132 as a de minimis fringe benefit. In general, tax-free de minimis fringes are benefits provided by employers that are offered infrequently and have a fair market value (FMV) so small that it is impractical and unreasonable to account for them. Examples are:
- Traditional birthday or holiday gifts of property with a “low fair market value”
- Presents such as books or flowers provided to employees under special circumstances
- An occasional cocktail party, group meal or picnic for employees and their guests, or occasionally giving out theater or sporting event tickets.
Employees include any recipient of a fringe benefit. (Thus, partners, members of LLCs taxed as partnerships, and more-than-2% S shareholder-employees are eligible to receive the above tax-free de minimis fringes.
Cash, gift certificates or debit cards are ALWAYS includible in employee wages.
Employee achievement awards: An employee achievement award is tangible personal property that is awarded for one of two purposes, length of service or safety achievement. For the length of service award, the award cannot be received in the first five years of employment or a similar award cannot have been received in the previous four years. For a safety achievement award, the award cannot be given to a manager, administrator or professional employee – nor can it be given to more than 10% of the total employees during the year
Either type of award must be made as part of a meaningful presentation, and under conditions and circumstances that don’t create a significant likelihood of disguised pay.
Awards of cash, gift certificates or other nontangible items don’t qualify as employee achievement awards. However, under proposed regulations, vacations, meals, lodging, tickets to theatre and sporting events, stocks, bonds and other securities wouldn’t be considered tangible personal property.
Qualified vs. nonqualified plan award: An employee achievement award can be a qualified plan award or a nonqualified plan award. To be a qualified plan award, the employee achievement award must be made as part of an established written plan that doesn’t discriminate in favor of highly compensated employees as to eligibility or benefits. A highly compensated employee is an employee who:
- Was a 5% owner at any time during the determination year or the preceding year, or
- For the preceding year, received more than $120,000 (in 2017 or 2018) in compensation from the employer and, if the employer elects, also was in the “top-paid group” (top 20%) of employees for that year.
Additionally, an award is not a qualified plan award if the average cost of all the employee achievement awards given during the tax year is more than $400. An employee achievement award that isn’t a qualified plan award is a nonqualified plan award.
Employer’s deduction for employee achievement awards: The employer’s deduction for the cost of all nonqualified plan awards made to any one employee during the tax year can’t exceed $400. The employer’s total deduction for the cost of employee achievement awards, including both qualified and nonqualified plan awards, made to any one employee during the tax year can’t exceed $1,600.
Employee’s exclusion for employee achievement award: If the cost of an employee achievement award is fully deductible by the employer under the above rules, the employee can exclude the entire FMV of the award.
Source: Thompson Reuters/Tax & Accounting (2017, December 4) Tax consequences of giving gifts to employees. Checkpoint Newsstand