Employers can compensate workers with cash, stock and various job benefits, but companies can also give gifts to employees for work achievements. Such achievement awards you receive for job performance are included in your taxable income, but if you get an award for length of service such as a retirement gift, it may be tax exempt. Gifts have to meet certain rules and guidelines to qualify for tax-exempt status and gifts of significant value are taxable.
Awards of cash and cash equivalents from an employer are always included in your taxable income, even if you receive an award based on your years of service rather than an achievement award. Cash equivalents describe assets that are easily convertible to cash like a savings bond, gift card or gift certificate. According to the Internal Revenue Service, food, lodging, tickets to sporting and theater events and stocks are also forms of compensation that don't qualify for tax-exempt status.
Awards of Tangible Property
Awards of tangible personal property can qualify for a tax exemption. Tangible personal property describes objects of value like jewelry, electronics or sporting goods. An award of tangible property must be made as part of a meaningful presentation, such as a retirement ceremony, to qualify for tax-exempt status – a tax-exempt gift can't be wages disguised as an award.
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Tax Exclusion Limits
The tax exclusion for awards of tangible property is subject to a limit of $1,600 per year and a limit of $400 applies to awards that are not qualified plan awards. According to the IRS, an award is not a qualified plan award if the average cost of all employee achievement awards an employer gives during the year is more than $400. A qualified plan achievement award must be given in connection with an established, written plan that doesn't tilt eligibility toward highly compensated employees. For 2017, highly compensated employees are either those who own at least 5 percent of the business during the current or prior year, or employees receiving more than $120,000 in annual pay.
If you receive gifts with a total value that exceeds the annual exclusion, you are taxed on the excess. For example, if you receive a $1,000 watch and a $2,000 set of cuff links from qualified plan, you can exclude the first $1,600 but you owe tax on the remaining $1,400.
If you don't stay at your job long enough or you receive an award for length of service too soon after getting a different award, your gift may be taxable. The IRS requires you to have worked at job more than five years to qualify for a tax exclusion on a length of service award. In addition, you can't exclude an award from tax if you received another length of service award during the same year or any of the previous four years.