Awards and Their Tax Implications

By Stefan Schumacher, editor of The Payroll Blog

Awards for employees are a big deal in today’s workplace. In fact, they’re a $46 billion niche market. Companies are becoming more savvy about ways to reward their staffs, aside from just a paycheck. This may come in the way of a cash prize or a trophy.

Awards and prizes given to an employee by an employer are often subject to federal income tax withholding (Social Security, Medicare and FUTA). However, some noncash awards are not subject to taxes, such as an award for years of service or a medal for providing the best customer service. Cash or cash equivalent awards, though, must be included on the payroll.

How Much is This Award Really Worth?

The important thing to takeaway, of course, is if you give out a $200 cash prize, it’s not really going to be worth $200. Employers have to decide if they want to make up for that and gross up the award so the employee receives the full amount.

Payroll Rule for Awards

One general rule for payroll regarding the treatment of awards and prizes for tax purposes is that the value of achievement awards given to an employee can be excluded as income if the cost is not more than the amount the employer can deduct as a business expense for the year. Regardless, the maximum excludable annual amount for employee awards is $1,600.

Recognizing your employees is often a great way to motivate employees and show them they’re appreciated. This can be done in the form of an email, a yearly or quarterly awards presentation or a pizza party. Just keep in mind the tax implications regarding cash rewards and make sure to adjust your payroll accordingly.

Of course, some studies suggest that the best reward you can give an employee is a simple “thank you.” As far as we know, there are no payroll implications for this form of recognition.

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