Our primary objective at Blueboard is to create an exceptional experience, and we’re fortunate to work with hundreds of clients who believe in investing in their employees in a meaningful way through Blueboard's employee reward programs.
A sensitive topic that often comes up during budget planning is how to calculate taxes on employee rewards. Do we gross up the reward to relieve the tax burden, or do we pass the taxes onto the employee?
Ultimately this choice is yours, but our recommendation at Blueboard is to gross up the reward value, which relieves the rewarded employee of this tax burden. Why? Because passing taxes onto the employee can distract them and potentially cause hesitancy for something that was originally intended to feel rewarding. Bringing monetary decisions into the process switches the role of the employee from a recipient to a buyer because they now have financial skin in the game. Thus, the otherwise positive and energizing anticipation effects associated with the start of their experience journey might change to stressful decision fatigue. When taxes are reimbursed, the employee continues to perceive the reward as a gift and can focus their mental energy around their exciting activity ahead.
Your company has two choices when it comes to planning and managing taxes for employee rewards, here’s our perspective for each side:
Pros to Grossing up
- Employee’s take-home pay is unaffected by the reward and they can focus on the experience itself.
- Employees are more likely to choose something they wouldn’t normally have paid for themselves, which is more likely to create stronger memories and a positive Afterglow from their experience. These positive feelings are attributed to you as an employer, which strengthens the effectiveness of your employee recognition platform.
Things to Consider when Grossing up
- You’ll need to budget more per reward when planning your program budget since you’ll internally need to anticipated taxes for each reward.
- The additional internal workflow is required when adjusting your payroll settings to incorporate the reimbursement.
Pros to Taxing the Employee
- You’re able to budget more spend on rewards since you are not internally covering the cost of taxes.
Things to Consider when Taxing the Employee
- Forcing employees to bear the tax burden potentially weakens the underlying intent of creating a memorable, meaningful, and rewarding recognition program that differentiates your company in your industry
- Employees are more focused on how to best maximize and squeeze their experience value, vs. choosing something that fulfills their inner wants vs. inner needs.
- Potential for lower redemption rates and slower adoption, which can affect your utilization goals.
While we can’t officially consult you on how to manage your taxable rewards, we are happy to connect and share best practices from our clients beyond what's covered in this short article. We also recommend you consult the experts (our friends at the IRS), reviewing their official recommendation in this informative article.