Gifts, Awards, and Prizes
Because the IRS basically does not believe that employers can act with a detached and disinterested generosity toward their employees, most gifts that you give to your employees are presumed to be compensatory in nature. Accordingly, unless you can show that a gift is connected with an event that's totally unrelated to your business (for example, an employee's wedding), gifts to your employees are considered taxable wages for payroll tax purposes. Gifts of property are treated no differently from monetary gifts.
Christmas gift exception. During the Christmas holiday season, the IRS does allow you to show a little generosity toward your employees without incurring additional payroll tax liabilities. Christmas gifts are not considered taxable wages if the gifts are items of property having nominal value (for example, a turkey or a ham). This exception does not apply to small gifts of cash.
Awards and prizes. Employee prizes and awards also are generally considered taxable wages, on the theory that you present them in return for an employee's performance or services. However, there are three limited circumstances under which you may be relieved from payroll tax obligations on noncash awards:
- Employee achievement awards of tangible personal property that are awarded to an employee because of the employee's length of service (including retirement), productivity, or safety achievement, made under a written plan that does not discriminate in favor of highly compensated employees, and which average $400 or less during the year, are not taxable wages. They are considered "qualified" plan awards.
- Other awards are considered "nonqualified" and no more than $400 in nonqualified awards can be exempt from taxable wages for any one employee. Up to $1,600 in total awards, both qualified and nonqualified, will be exempt from wages for any one employee per year.
- When you give a noncash award to a retail commission salesperson whom you ordinarily pay only cash commissions, you can elect not to withhold federal income taxes with respect to the award. However, you will remain responsible for FICA taxes, unemployment taxes, and possibly state income taxes on the award.
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