Motivosity & Taxes: Awards & Gift Cards
As an employer using Motivosity’s recognition platform, understanding the tax implications of awards and gift cards provided to employees is crucial for compliance and maintaining a rewarding experience. This guide outlines key IRS rules and provides tables to illustrate various tax scenarios.
General Taxability of Awards and Gift Cards
Cash and Cash Equivalents: Cash and gift cards are generally taxable as income. The IRS treats gift cards similarly to cash, meaning they are subject to income tax regardless of amount or purpose.
Excludable Awards and Gifts Under IRS Guidelines
Some non-cash benefits can be excluded from taxable income if they meet specific criteria:
De Minimis Fringe Benefits: Small, infrequent gifts of minimal value (e.g., branded merchandise, holiday gifts) are typically not taxable. Gift cards are generally not considered de minimis due to their cash-like nature, making them almost always taxable.
Achievement Awards: Awards for length of service or safety can be tax-exempt if:
The award is tangible personal property (not cash or gift cards).
The award's value is within IRS limits: up to $400 for non-qualified plans and up to $1,600 for qualified plans.
The award must be presented meaningfully and not disguised as compensation.
Gift cards do not qualify as tangible personal property and remain taxable.
Holiday or Occasional Gifts: Tangible holiday gifts (e.g., fruit baskets) may be excluded under the de minimis rule. Cash and gift cards given during holidays are always taxable.
Promotional or Incentive Items: Items of nominal value (e.g., T-shirts or mugs) may be excluded as de minimis benefits. Gift cards are still taxable.
Summary of Taxability:
Gift cards are almost always considered taxable income. Non-cash awards that meet specific criteria (e.g., tangible awards) may be excluded from taxable income.
Reporting & Employer Decisions to Make
Motivosity offers automated reporting that can be organized by department, entity, country, or custom fields. These can be scheduled for delivery to payroll/tax teams to ensure regulatory compliance. Employers need to make two key tax-related decisions.
A. Grossing Up Taxes vs. Employees Paying Taxes
Criteria | Grossing Up Taxes | Employees Paying Taxes |
Employee Satisfaction | Employees receive the full value without tax impact. | Employees may feel frustrated by tax deductions. |
Cost to Employer | Increases costs as the employer covers taxes. | Lower costs; employees pay their own taxes. |
Tax Compliance | Simplifies compliance as taxes are covered upfront. | Standard payroll processes used. |
Administrative Complexity | More complex due to calculating gross-up amounts. | Simpler to administer; taxes withheld from wages. |
B. Grossing Up Taxes vs. Employees Paying Taxes
Criteria | Tax at Award | Tax at Redemption |
Tax Timing | Employees taxed immediately; clear process. | Employees taxed only when value is realized; flexible timing. |
Treatment at termination | Unredeemed rewards generally cashed out through payroll. | Unredeemed can be configured to be returned to employer. |
Accounting Complexity | Simpler for the employer; taxed upfront. | Could be more complex due to redemptions/returns timing. |
Employee Satisfaction | May impact satisfaction as taxation happens sooner. | Generally more preferable to employees to be taxed at redemption. |
IRS Scrutiny | Generally preferred by the IRS for non-cash awards. | Employers may choose to tax at redemption |
Conclusion
Employers should evaluate their tax approach and communicate tax implications clearly to employees. For specific guidance, consult IRS Publication 15-B and the IRS Fringe Benefit Guide. Generally, rewards and incentives are taxable internationally. For country-specific payroll requirements, refer to PwC’s Worldwide Tax Guide.
By understanding these rules, you can better navigate the complexities of employee recognition while ensuring compliance with IRS guidelines. For any specific tax questions, please consult a qualified tax advisor.
Legal Disclaimer
This guide is intended for informational purposes only and does not constitute legal or tax advice. Employers should consult with a qualified tax advisor or legal professional for specific guidance tailored to their circumstances.