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  Tax Implications Of Recognition Rewards: Q&A with best-selling author Bob Nelson
Some companies shy away from using recognition awards because of a fear of potential tax implications. Much of this fear is unwarranted and can be set aside by understanding the relevant guidelines from the tax code regarding employee awards.

Q: How are most employee awards taxed?
A: Most prizes, awards, and gift certificates are taxable as gross income. The following must be included in an employee's gross income:

  1. Awards for outstanding sales or production or for sustained individual performance
  2. Awards in contests of all types
  3. Travel awards

Q: How can we give employees tax free awards?
A: Companies are allowed to spend up to $25 per year on each employee, tax-free, for a business gift. Achievement awards of tangible personal property for length of service or safety are excluded from employee income, as are achievement awards that are transferred to charity at the recipient's request.

Special deduction limits apply to these awards, provided they are given as part of a presentation under circumstances indicating they are not a form of disguised compensation. These types of awards include, but are not necessarily limited to: length of service awards, safety achievement awards, group travel awards and clothing allotments.

Q: What are the rules regarding length of service awards?
A: Every employee can receive up to a $400 service award every five years of service. Only one length of service award every five years is considered to be an employee achievement award.

Q: How should we handle safety achievement awards?
A: As much as ten percent of a company's employees can be given up to $400 annually as reward for achievement in increasing job site safety. Such awards granted to managers, administrators, clerical employees, or professional employees, however, are not considered employee achievement awards, and are therefore taxable.

Q: Are group travel awards deductible?
A: If they are a legitimate business expense, yes.

Q: How much is allowed under the tax code for clothing allotment gifts and awards?
A: A $200 to $300 allotment for the purchase of work clothes is allowed each year, depending on the company, the industry, the level of employment of the person in question, etc.

Q: Should we shy away from taxable rewards?
A: As in any reward situation, the individual employee and his or her achievement will dictate the appropriate award. Bonuses and the like, for instance, are generally, if not always, taxable, but are also generally, if not always, much appreciated.

It is important to remember that a rewards program should be designed, so it does not cost the company or the award recipients any unexpected taxes.

An excellent and effective strategy may be to make use of non-monetary awards when appropriate. After all, what employees want the most is to be valued for a job well done by those they hold in high esteem.

Bob Nelson is President of Nelson Motivation, Inc. He is the author of the best-selling books, 1001 Ways to Reward Employees, 1001 Ways to Energize Employees, and the new 1001 Ways to Take Initiative at Work, all published by Workman Publishing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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