Advice on navigating the tax codes around employee gifts
Qualified plan awards
The amount of your deduction depends on whether your award is considered a "qualified plan" award. To be a qualified plan award, the award for length of service or safety achievement must be given under an established written plan or program that does not discriminate in favor of highly compensated employees.
You may deduct up to $1,600 for all qualified plan awards (safety and length of service) given to the same employee during the taxable year. The average cost of all awards under the plan for the year (to all employees) must not exceed $400. In determining this $400 average cost, awards of nominal value are not to be taken into account. The $1,600 limit applies if the same employee receives some qualified plan awards and some non-qualified awards in the same year. If the award is not a qualified plan award, the annual deduction ceiling for each employee is $400.
The employer's deductible amount for an employee achievement award is tax free to the employee. For example, if you give a qualified plan award costing $1,800 to an employee, you may deduct only $1,600. The employee is not taxed on the award up to $1,600; the $200 balance is taxable.
Length of Service Awards. Every employee can get a $400 service award every five years of service (this can be combined with cash awards for each five-year period). A length of service award is not subject to the above rules if it is given during the employee's first five years. Furthermore, only one length of service award every five years is considered an employee achievement award. However, gross income does not include the value of an employee achievement award received by the taxpayer if the cost to the employer of the employee achievement does not exceed the amount allowable as a deduction to the employer.
For example, an employee receives a crystal bowl for his employer as a length of service award. The bowl cost the employer $25 less than the deduction limit, but its fair market value was $25 more than the deduction limit. The employer made no other awards to the employee in that year and did not make any such awards to him in the previous four years. Employee can exclude the entire fair market value of the bowl since its cost is fully deductible by the employer.
Safety Achievement Awards. Ten percent of your employees can get up to a $400 gift annually related to safety. Safety awards granted to managers, administrators, clerical employees, or professional employees are not considered employee achievement awards. If during the year more than 10 percent of other employees (not counting managers, administrators, chemical, or professional employees) previously received safety awards, none of the later awards are subject to the employee achievement award rules. In addition, a $200 to $300 allotment of work clothes is allowed each year, which can be factored into certain aspects of an overall recognition program.