The Internal Revenue Service issues very little guidance on employee achievement (incentive) awards. Section 274(j) of the IRS Code, enacted by the Tax Reform Act of 1986, provides, in general, that an employer may deduct the cost of employee achievement awards given to the same employee up to $400 in any year. If the incentive awards are employee achievement awards made under one of the established written plans or programs of the employer, the $400 limit is increased to $1,600.
Under Code section 74(c), however, the same awards are not included in the income of the employee. In addition to being excluded from the employee's taxable income, awards are excludable for employment tax purposes, as well as from the Social Security benefit base. The employer must report on the employee's W-2 as wages or compensation any portion of the award that is included in the employee's income.
To qualify for this favorable tax treatment, an incentive award must be an “employee achievement award,” that is, it must be an item of “tangible personal property” transferred by an employer to an employee for safety achievement or length of service. Moreover, the award must be given as part of a meaningful presentation and cannot be the payment of disguised compensation to the employee.
SOURCE: George Delta, Esq., adviser to the Incentive Marketing Association