Rewarding employees for length of service, holidays


The year’s winding down, which means you’ll be working on W-2s soon. So now’s the time to make sure employees’ taxable income is correct.


It’s especially important for you to keep track of any length-of-service awards or gifts your company may give workers before year-end.


Award requirements


With length-of-service awards, it’s key to distinguish whether they’re distributed as part of a qualified or nonqualified plan for tax purposes.


The IRS considers a plan qualified if it doesn’t discriminate in favor of highly compensated workers and if it’s a written plan used by a company on a regular basis.


Under a qualified plan, awards must be given to employees for service in increments of five or more years.


Also, they need to be awarded during a “meaningful presentation” of two or more people.


The cumulative amount of any awards given to an employee can’t be more than $1,600. In addition, the average fair market value or cost of each individual award can’t be greater than $400. Any amount that exceeds this is taxable income.


With nonqualified plans, the award given to any one employee can’t be worth more than $400.


All length-of-service awards must be tangible property. Any awards of cash or equivalents (e.g., gift cards) or nontangible items (e.g., theater tickets) must be treated as taxable income, even if given as a length-of-service award.


Gift-giving exceptions


Gifts to employees are almost always taxable, with a few exceptions.


Some companies may give workers a turkey or ham for their holiday dinners. These gifts are considered de minimis by the IRS and not taxable. However, a gift certificate to purchase one may be taxable, unless it specifies it’s only redeemable for the turkey or ham.


Also, retirement gifts can be treated as length-of-service awards if they meet the above criteria.


Cite: “Taxable and Nontaxable Fringe Benefits, Part 1,” presented by Fred Baseshore, CPP, at the 2018 American Payroll Association Congress, National Harbor, MD.