Employee Achievement Awards

Employers complain that there is no way to reward their employees without adding to their payroll costs. Employers often have an employee who has maintained a good standing within a company with loyal, long term service or a great safety record and want to give them an incentive to continue to maintain these high standards for their company.

There is a way to reward an employee and accomplish this goal through an employee achievement award program within the company. The amount of the award is not treated as gross income if you as the employer are allowed to treat the award as a non-wage expense. Below are some of the questions I encounter concerning the rules of what you can and cannot do in order to get a deduction for an employee achievement award as well as excluding the award from your employee's W-2 income. If these rules are not satisfied, you will get a deduction for wages rather than for an employee achievement award and your employee will have taxable income on the amount of the award.

What is an employee achievement award?

An employee achievement award is an award given to one or more of your employees to reward your employee for length of service or meeting safety goals.

Can I give my employees a bonus at the end of the year based on profits and call it a length of service award?

No. You cannot base an award on profitability. As mentioned above, an employee achievement award is an award given to one or more of your employees to reward your employee for length of service or meeting safety goals. This has very specific requirements that must be met to avoid having to classify it as wages to your employee. If you meet the requirements, you can deduct the award as a non-wage expense, and the employee benefits also by not being taxed on the award value.

What are the requirements I must meet as an employer to deduct an employee achievement award?

All of the following requirements must be met for an award under either a qualified or unqualified plan to be deductible by an employer:

The award must be for length of service or for safety achievement, also known as employee achievement awards, and must meet the four following rules:

• The award must be in the form of tangible personal property. You cannot give cash or a gift certificate.
• The award must be given under conditions that do not create a likelihood of disguised compensation.
• The award must be given as part of a meaningful presentation such as an annual award ceremony.
• The value of the award may not exceed specified dollar limits (see below).

What is the difference between a qualified and unqualified plan for employee achievement awards as to the deductibility of the award?

An employee achievement award to one or more of your employees can be made up to a value of $1,600 for a qualified employee achievement award plan. Under a nonqualified employee achievement award plan, the maximum value you can give to any one employee is limited to $400. You have to keep in mind that under a qualified employee achievement award plan, even though you can make an award of up to $1,600 to one or more of your employees, your average cost per award for the year cannot exceed $400.

What do I need to do in order to make an employee achievement award be an award under a qualified plan?

You must have a written plan that does not discriminate in favor of highly compensated employees. A highly compensated employee is one of your employees that meet any one of the following three tests.

1. Your employee owns 5% or more of the company this year or last year.
2. The employee has total compensation of $80,000 or more.
3. Your employee is one of the top 20% of paid employees.

The average cost of all employee achievement awards you make to your employees during the year cannot exceed $400.

For purposes of the preceding sentence, the average cost of employee achievement awards that you make for the year will be determined by including the entire cost of all awards that you make divided by the total number of awards that you make for the year. Any award of $50 or less is not used in the computation of average cost of employee achievement awards paid during the year.

If I give an award to one of my employees that is more than the $1,600 qualified plan limit or $400 nonqualified plan limit, will this cause the entire award to be treated as wages?

No it will not. As long as all of the other rules have been followed, only the dollar amount in excess of the limit will be treated as compensation to your employee.

How do I determine which of my employees qualify for an employee achievement award?

For the length of service award to qualify, an employee must have worked for you for at least 5 years. Additionally, no one employee can receive an employee achievement award for length of service more than once every 5 years.

For the safety achievement award to qualify, it cannot be given to any of your managers, administrators, clerical employees, or professional employees. Additionally, no more than 10% of your other employees can receive this award in one year.

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