Sunday December 7, 2014
Yes, it’s that time of year. Whether you celebrate Christmas, Hanukkah, Ramadan, Kwanzaa or merely the end of the year, this is an excellent time to say thanks to employees. You've undoubtedly heard a financial planner tell you that it's not how much you make that's important, but how much you get to keep. Same is true of the gifts you give to employees. There are ways you can say thanks that are tax-free events to employees, and there are ways that are taxable events. Here are a few methods employers use to reward employees at year end, and the tax impact of each:
Cash bonuses (no matter how little) are subject to all federal and state withholding taxes and must be included on the W-2. Discretionary Bonuses or Holiday Bonuses don’t impact overtime earned for the year, as long as the bonus is not based on hours worked, production, or efficiency or are not required under a contract, promise, or agreement (such as an incentive or gainsharing plan).
Prizes / Awards given in recognitions of performance, success, or a good year, are subject to all taxes, even when given as merchandise. Non-cash Prizes are taxable at the fair-market value, and are subject to withholding, which gets interesting when there is no additional pay to withhold from. What this means is that you give people an award or prize, and then have to deduct additional withholding from their next paycheck.
Gifts such as turkeys, hams, alcohol, flowers, fruit baskets, etc., are generally not taxable to employees because they are considered a de minimis fringe benefit by the IRS - meaning that they have so little value that accounting for them would be unreasonable or administratively impracticable. Think turkey!
Gift Certificates that can be used for only a designated item at a designated store may be considered non-taxable. However, ones that are for a specific amount for general merchandise, or those convertible to cash, are fully taxable to employees. Morale of the story? Give a gift certificate for a turkey at King Soopers rather than a gift certificate for $25 for a turkey. Make sense?
Party Costs are non-taxable if given infrequently and for the purpose of promoting employee health, goodwill, contentment, or efficiency. You can get pretty lavish and elaborate with your parties - food, drink, live entertainment, all for the employees and guests, all tax-free to the employees. And you can create an institutional memory that will engage your people and further build your culture.
Tickets for entertainment or sporting events are an excellent way to recognize and reward employees. They are also considered de minimis if provided on an occasional basis, meaning that they are not taxable to employees. While it's not true of season tickets, it is true of box seats. The key is to make it occasional. Another key is to invite your clients to the box also. Use it to build relationships which will foster retention - employee and client.
No-Additional Cost Services meaning services you provide to your customers in the ordinary course of the line of your business may be provided to your employees for free or at a reduced price, tax-free. Think excess capacity. In some industries (such as travel), this is a great way to provide a special perk to employees that is unique to your industry.
Working Condition Benefits are property or services you provide so employees can do their jobs – and they are tax-free. There are plenty of examples of property or services you can use – like mobile devices, laptops, docking stations, a 2nd monitor – as long as it’s related to the employee’s job.
Employees love to show off and talk about what their company has done for them. They want to be proud of the place they work. But that doesn't mean gifts have to be huge or expensive. Sincere appreciation goes a long way. Give gifts or celebrations that create a lasting memory or create what I refer to as residual value, and that memory will build loyalty and retention that will pay you back many times over. Many happy returns!