As mentioned above, in general, rewards, bonuses and gifts are taxable, with some limited exceptions. If you give an employee cash or a cash equivalent, such as a gift card, it's taxable regardless of the amount or purpose. Employers must record taxable income on the employee's W-2 form at the end of the year. The IRS says that cash rewards for exceptional performance are taxable income for employees.
Non-cash gifts for the duration of service or safety awards are accepted, provided they are not too valuable. In general, cash and rewards given to employees for their good work or suggestions are taxable income, since they are presented in exchange for an employee's performance or services. Therefore, cash awards and the fair market value of non-monetary awards are generally subject to federal income tax withholding and to FICA and FUTA taxes. The cost of awarding tangible personal assets under the limits set by the IRS is not taxable for the employee.
All other prizes are considered compensatory, including travel and gift certificates, and are subject to payroll taxes. Similarly, awards of tangible personal property awarded to employees for security reasons are not considered employee income if the value of the compensation does not exceed the limits specified in the Internal Revenue Code. In the case of an employee rewards program, on the other hand, as long as the rewards listed in the catalog of incentives are not equivalent in cash, it could be said that employees should have the right to refuse rewards without redeeming their points. When they unsubscribe, employees will not receive additional points and, therefore, their value equivalent to the exchange will not increase, nor will they be able to accumulate additional points to redeem rewards with a higher prize level.
Incentive companies must be very careful that awards for security achievements qualify for preferential tax treatment under section 274 (j) of the Code, or the employer could lose its deduction and be responsible for paying additional overtime to its employees under the FLSA, and the employee may need to include compensation in their income. The IRS defines the employee achievement award to include specific terms for seniority of service awards, security awards, and awards given during significant presentations. The company must present the awards with enough fuss to show that they are special, not just a sneaky form of tax-free wage awards. Until X has accumulated sufficient points to redeem the designated prize, your right to the prize is arguably subject to a significant risk of loss, since you must provide services in the future before you have a personal interest in the prize.
For example, an incentive grant will not qualify for favorable tax treatment if it is granted at the same time as the annual wage adjustments are made or if it is used as a substitute for a cash bonus program. By giving employees the option of distributing the withholding attributable to the reimbursement of an award over several pay periods or, alternatively, allowing employees to include the value of a non-monetary award in income at the time the employee receives a cash bonus, employers can help alleviate some of the negative cash flow problems caused by withholding additional non-cash benefits. Seniority awards awarded to a person before five years or two awards have elapsed in a five-year period are fully taxable. Tangible golf clubs, a tablet, a watch or Godiva chocolates may be the exception if they are not awarded for their achievements, but rather as a reward for safety or seniority.
The most common problems with security achievement plans are that rewards are sometimes awarded to more than 10% of eligible employees, or that the prizes are not merchandise or other tangible personal assets (e.g., travel, vacations, meals, lodging, tickets to theater or sporting events, etc.). If you receive several awards in a year, those figures apply to the total, not to each individual award. Assuming that points are exclusive to the employer's rewards program and that the employee cannot transfer them, they only have value in the context of the program under which they are awarded. .
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