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GIFTS TO EMPLOYEES

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TAX CONSEQUENCES OF GIVING GIFTS TO EMPLOYEES

This is the time of the year when many employers give deserving employees a reward for a job well done, or acknowledge a good working record. It also may be an occasion to say goodbye to long-time workers who are retiring. Certain forms of Employee Gifting MUST BE INCLUDED as wages and reported on year end W2 forms. Below is a list of gifts that a required for payroll reporting and gifts that DO NOT require payroll reporting.

RULES FOR GIFTS THAT MUST BE CONSIDERED PAYROLL AND SUBJECT TO PAYROLL TAX AND WITHHOLDING

If an employer gives cash, gift certificates, debit cards or similar items that are convertible to cash, the value is considered additional wages regardless of the amount. For example, where an employer that had been giving employees hams, turkeys, or gift baskets as a holiday gift, but then switched to giving holiday food gift coupons with a face value of $35 that were redeemable at a number of grocery stores, IRS concluded that the coupons were taxable to its employees, and subject to employment taxes (e.g., FICA) and withholding taxes. If the coupons were nontransferable and convertible only into a turkey, ham, gift basket, or the like at a particular establishment, they would not be treated as cash equivalents.

RULES FOR GIFTS THAT ARE NOT CONSIDERED PAYROLL

All of the following are treated as de minimis fringes, which are tax-free to the employee yet deductible in full by the employer:

      • Traditional birthday or holiday gifts of property (not cash) with a "low fair market value" (an undefined term in the regs).
      • Presents such as books or flowers provided to employees under special circumstances (e.g., outstanding performance).
      • An occasional Holiday party, group meal for employees and their guests, or occasionally giving out theater or event tickets.
      • Employee achievement awards. (SEE BELOW)

Employee achievement awards. An employee achievement award is tangible personal property that is awarded for one of two purposes:

  1. Length of service. An award won't qualify as a length-of-service achievement award if the employee either
      a. Receives the award during the first five years of employment; or
      b. Received a length-of-service award (other than one of de minimis value) during the year or in any of the prior four years.


  2. Safety achievement. An award won't qualify as a safety achievement award if it is given to:
     a. A manager, administrator, clerical employee, or other professional employee; or
     b. More than 10% of the employees during the year, excluding those listed in (a), above.

Either type of award must be made as part of a meaningful presentation, and under conditions and circumstances that don't create a significant likelihood of disguised pay.

Awards of cash, gift certificates or other nontangible items don't qualify as employee achievement awards. However, under proposed regulations, tangible personal property would include a nonnegotiable certificate conferring only the right to receive tangible personal property. But if a certificate entitled an employee to receive a reduction of the balance due on his account with the issuer of the certificate, the certificate would be a negotiable certificate and wouldn't be tangible personal property. Vacations, meals, lodging, tickets to theatre and sporting events, stocks, bonds and other securities also wouldn't be considered tangible personal property.

Qualified vs. nonqualified plan award. An employee achievement award can be a qualified plan award or a nonqualified plan award.

To be a qualified plan award, the employee achievement award must be made as part of an established written plan that doesn't discriminate in favor of highly compensated employees as to eligibility or benefits. A highly compensated employee is an employee who

 
1. Was a 5% owner at any time during the determination year or the preceding year, or 

2. For the preceding year, received more than $120,000 (in 2017 or 2018) in compensation from the employer and, if the employer elects, also was in the "top-paid group" (top 20%) of employees for that year.
Additionally, an award is not a qualified plan award if the average cost of all the employee achievement awards (other than those of minimal value) given during the tax year (that would be qualified plan awards but for this limit) is more than $400.

An employee achievement award that isn't a qualified plan award is a nonqualified plan award.

Employer's deduction for employee achievement awards. The employer's deduction for the cost of all nonqualified plan awards made to any one employee during the tax year can't exceed $400. The employer's total deduction for the cost of employee achievement awards, including both qualified and nonqualified plan awards, made to any one employee during the tax year can't exceed $1,600. If the award is made by a partnership, these limits apply to the entity as well as each member of the partnership.

Employee's exclusion for employee achievement award. If the cost of an employee achievement award is fully deductible by the employer under the above rules, the employee can exclude the entire FMV of the award.

This could be the last year to take advantage of employee achievement awards. The House-passed Tax Cuts and Jobs Act (but not the Senate version) would repeal the exclusion of employee achievement awards under Code Sec. 747, effective for tax years beginning after Dec. 31, 2017.

 

 

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