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Are employee awards taxable?

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Length-of-service or safety awards [IRC §3121 (a) (20)] can be excluded from federal taxable wages—if they:

  • are not “disguised compensation”;
  • are given under a written, qualified plan or program that does not favor highly compensated employees
  • do not exceed an average of $400 per employee (or $1,600 for the year) and, if not paid under a qualified plan, do not exceed $400 per employee
  • are not tangible personal property, cash or cash equivalents, such as stocks, bonds, meals, lodging or sports or theater tickets; and  are given in some kind of ceremony. [IRC §74(c), 274(j)]

Length-of-service awards are federal taxable wages if given before 5 years’ service but nontaxable after 5 years’ service and not more frequently than every 5 years.

Safety awards are excluded from federal taxable wages if also given to management, administrative, professional, clerical and part-time employees but not to more than 10% of eligible employees during the taxable year. If, say, 12% of employees qualify, all safety awards are taxable for all employees.

Suggestion awards are excluded from an employee’s hourly pay rate when calculating overtime pay—if . . .

  • the employee was not required to give suggestions;
  • the award was not geared to the person’s salary;
  • no time limit was set for submitting suggestions;
  • offering suggestions is not part of that job (e.g., the job is not troubleshooting the equipment the suggestion applies to, or surveying employees for ideas on how to improve some procedure);
  • the employee made a suggestion completely on his or her own (no employer input at all); and
  • the employer had no idea that the employee was working on the suggestion.
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