Granting awards to your employees is an excellent way to recognize their high achievement and continue to maintain it. But while it can help the employee’s wallet, it results in costs to the employer. This leads business owners to ask “Are employee achievement awards deductible?” Read on to learn about how businesses can receive a reward for their generosity through an employee achievement award deduction.
When Are Employee Achievement Awards Deductible?
Employers aren’t the only ones that recognize the value of a job well done. So too does the IRS, which makes the allowance for employers to deduct amounts paid out to employees for achievement-related awards.
Though achievement awards disbursed as either cash or property are both eligible for deduction, awards disbursed in the form of property must meet more strict criteria that may limit your ability to claim the employee achievement award deduction.
The IRS deems that achievement awards for items of tangible personal property (that is, items excluding cash, a gift certificate or similar item) must meet the following criteria: they must be given to an employee for length-of-service or safety achievement, must be awarded as part of a meaningful presentation and must be awarded under conditions that do not make it likely that the award is actually disguised pay.
In practice, the terms length-of-service or safety achievement awards may not be the label of the awards your business grants to its employees. So what do these labels signify? Achievement awards qualify as length-of-service awards if the employee either receives the award after the first five years of employment or didn’t receive another length-of-service award of significant value during that year or in any of the preceding four years.
Safety awards qualify for deduction if at least one of the following criteria is met: the award is given to a manager, administrator, clerical personnel or other professional employee—or during the tax year, more than 10 percent of your employees already received a safety achievement award of significant value.
What Is the Value of the Employee Achievement Award Deduction?
The employee achievement award deduction for awards granted to a single employee in the tax year is limited to $400 for awards not classified as qualified plan awards, and $1,600 for all awards (whether qualified plan awards or not). A qualified plan award is defined as an achievement award granted by means of unbiased written plan that doesn’t unfairly favor highly compensated employees—an employee that was either a 5-percent owner at some point during the year or the year prior, or received more than $115,000 in compensation for the prior year.
In addition, if the average cost of all employee achievement awards in a given tax year (ignoring the cost of awards of nominal value) exceeds, $400, it would not qualify as a qualified plan award.
Once you have assessed that the achievement awards you have given to your hard-working employees are eligible for deduction, you can deduct these awards as non-wage business expenses on your business schedule or return.
For more information about tax considerations for employee achievement awards, see IRS Publication 535.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.