Blueboard has revolutionized the way HR leaders and managers recognize employees through a one-of-a kind, hand-curated global menu of experiential rewards. As with any new employee recognition platforms, there are questions. One we hear quite often is, “Who should pay the income taxes on the rewards, the employee or the company?” And, “Once we reward the experience, how do we account for it?”
In this blog we’ll answer both those questions and provide a bit of detail to make your Blueboard reward-giving experience the best possible for all involved.
Who should pay tax on employee rewards?
The recent COVID-19 pandemic has had a devastating impact on employee morale. A recent Microsoft study showed that over 40% of the global workforce is considering leaving their employer this year. To reverse this trend, innovative recognition platforms such as Blueboard are helping companies recover the positive spirit in their teams.
The fact is that these employee rewards have an inherent cash value which the IRS can sometimes consider as compensation and, as a result, may be taxable. In these cases, companies often want to know, who should pay the tax, the employee or the employer? If the employee pays it can mean that they lose a good chunk -- usually around 28% -- of the value of the reward.
Our position on this is that requiring the employee to pay the tax will lessen the effect of the reward. An analogy would be when a friend takes you to dinner for your birthday -- and then asks you to pitch in when the check comes! It dampens the spirit of the gift.
The better solution for all involved is to ensure that the employee gets the full face value of the reward. In this case the income taxes are paid for, and thus offset, by the employer. This is done by “grossing up” the reward to include the taxes that the employee would otherwise have to pay for out of pocket.
For example if the reward is a romantic wine tasting weekend in Napa Valley valued at $1,000, then the company “gross up” the reward value in their accounting system to accommodate any applicable taxes. For this example that would mean that the employer would pay $257.54 extra to compensate for the taxes on the $1,000 wine tasting reward.
Calculating the gross up is fairly simple to do and most payroll systems can do this with little effort. More detail on this process is provided later - keep on reading :).
The good news is that some employee rewards are not taxable, so you won’t always have to gross up the reward amount to compensate for the employee’s taxes.
Which types of employee rewards are taxable?
The answer is, as seemingly always in life, it depends.
Taxation depends on the type and value of the reward that is granted. Rewards that benefit the employee directly such as cash, merchandise, gift cards, or trips, etc., are usually taxable. An example of this is a performance-related award, such as a bonus.
Some awards though, such as length-of-service (anniversary awards) or safety awards, are sometimes not taxable as income.
Note: Examples of intangible benefits include telecommuting, autonomy, employee recognition, advancement opportunities and work-life balance. Since these do not benefit the employee directly, they are not taxable.
Here are some general guidelines that you can apply to your Blueboard rewards tax and accounting processes.
Taxable: Experiential rewards based on performance.
Generally speaking, rewards, including experiential rewards like those from Blueboard, are taxable since they are given in return for an employee’s performance or services. As a result these awards should be taxed at their Fair Market Value, which is provided by Blueboard, and are subject to federal income tax withholding, FICA and other taxes.
Note: Fair Market Value (FMV) reflects the value of the reward as it would be obtained in the open marketplace. It does not necessarily equal what the company paid for, whether that amount is greater or lesser than the FMV.
Not taxable: Exceptions—service awards, safety awards.
Of course, there are always exceptions. And when it comes to taxes, this is a good thing.
Tangible awards for length-of-service, e.g., a five-year anniversary award, are not considered employee income if the value of the award does not exceed limits specified in the Internal Revenue Code. (See more references at the end of the blog.)
The exceptions to this exception include:
- The employee receives the award during his or her first five years of employment.
- The employee received a length-of-service award (other than one of very small value) during that year or in any of the prior four years.
Tangible awards given to employees as safety awards, or for quality assurance award achievement are not considered employee income if the value of the award does not exceed limits specified in the Internal Revenue Code. The exceptions to this include:
- Awards cannot be received by a manager, administrator, clerical employee, or other professional employee.
- Awards cannot be given to more than 10% of the employees during the year.
Both service or safety awards must be awarded as part of a meaningful presentation and awarded under conditions and circumstances that do not create a significant likelihood of the payment of disguised compensation.
In both service and safety awards the IRS has value limits:
- $400 per employee per year for all awards presented under a non-qualified plan; or,
- $1,600 per employee per year under a plan that doesn’t favor highly compensated employees, and that has an average benefit of $400 or less per employee over the year.
To learn more about taxable and non taxable rewards, please refer to this resource for more details.
De minimis benefits.
Another award that isn’t taxable is one which falls under the de minimis category. These are awards that are of such a small value that it’s unreasonable to account for them. An example is coffee and doughnuts furnished to employees, or holiday gifts with a low fair market value.
The de minimis rule has no set dollar limit, but the IRS has ruled in one particular case that a gift over $100 must be treated as taxable income. A second caveat is that the gift must be infrequently given.
Based on this Blueboard experiential rewards do not generally fall into the de minimis category due to our reward levels starting at $150 FMV.
How do I calculate the taxes on my employee rewards and recognition program?
To answer this question, we asked Kim Lain, VP of Finance at the Menlo Park, CA-based accounting firm of Kranz Consulting.
Kim shares, “All modern payroll systems, from basic QuickBooks, to NetSuite, to SAP, can calculate the gross up for an award or a bonus. And the good thing is that these systems are kept up to date from a compliance perspective, so you will be in line with the IRS, GAAP, and other regulations. If you need to do a quick calculation there are several online sites that can help; my personal favorite is Paycheck City’s gross up calculator, which provides results in real-time.”
The image below shows how easy it is to use Paycheck City’s website to get a quick estimate on an award gross up. You put in the award amount and the site tells you how much you need to add to adjust for taxes.
Note that these are US guidelines. If you provide Blueboard rewards to international employees, you should consider IFRS guidelines, which are similar to GAAP in the US, for compliance purposes.
International considerations – IFRS guidelines.
Awards are a universally loved employee perk, so when providing them to your international employees the local tax laws must be taken into consideration.
Sharon Spiteri, corporate controller at Malta-based international e-payments company RS2, stated that in Europe, they only gross-up performance awards. Other awards fall into a “staff welfare” category and aren’t taxed. She recommends following IFRS guidelines for European companies. A good source for these guidelines can be found here on the IFRS website.
Channel partner rewards taxation
Most companies utilize many different sales outlets; a particularly popular one is a sales channel, or distributor, to resell their products and services. Providing incentives, often called SPIFFs, is a great way to motivate partners to sell more. Blueboard’s cool new experiential travel rewards program fits this bill and more. It enables companies to go beyond mere cash commissions and provides motivation through exciting travel and luxury goods that are almost certain to bring in big sales numbers.
Vis-a-vis taxation of channel rewards, they are similar to other forms of compensation. For example, if the reward is given to a corporation (and not a proprietorship or partnership), it isn’t taxable to an individual as income. If it is awarded to an employee -- outside of their employment -- or an independent agent, however, it is taxable, just as if they were an employee. And you would have to issue a 1099 to them to reflect the value of the reward.
Who’s responsible for tracking the rewards?
For companies giving rewards to individuals (ie, employees of resellers, dealers, etc.), that company must track the reward value and issue a 1099 if the total amount given is over $600 in a calendar tax year. If the reward goes to a corporation, that corporation is responsible for tracking the rewards given to it.
For example, a manufacturer is running a promotion for it’s resellers’ salespeople, where the person who sells the most products will win a $1,000 Blueboard reward. In that case, the manufacturer will have to send a 1099 form to the winner, who will be responsible for paying any requisite taxes.
Employee recognition programs are more important than ever in our post-COVID-19 world, especially in remote or hybrid working environments. Meaningful and personalized employee rewards, like our experiences at Blueboard, can go a long way to keeping employees motivated and excited to do their best work. And rather than asking the employee to pay taxes on their rewards, we recommend that the reward giver, ie, the company, gross up the reward so that the employee gets the full face value. This is a very simple task for most payroll systems.
Also, it’s good to know what’s taxable and what’s not, as not all awards must be taxed. The guidelines for these are generally that performance-based awards are taxable, and tangible awards for service and safety awards sometimes may not be taxable as income.
Please consult your tax advisor for the best course of action for your organization’s employee rewards and recognition program.
For more information on how you can celebrate great work with the best experiential rewards in the business, book a time to learn more with our Sales team. Your employees will thank you!
For more information on US exemptions, refer to the Internal Revenue Code Secs. 274(j) and 3402(j). Also, these webpages on taxable awards and tax implications also contain good information for continued reading and research.