Trip Bonuses and Effects on Gross Income

According to the Incentive Research Foundation, 60 percent of U.S. companies use travel incentives to reward top performers. While a cash bonus might go toward paying bills, a trip bonus is often more motivating because it's more memorable. Research compiled by Oxford Economics USA shows that employees are often willing to work harder for a luxury item than for a cash bonus that's worth more money. For the recipient of a trip bonus, the effect on gross income and the corresponding tax implications depends on whether the trip is an individual incentive award, a group trip that's run as a company meeting or a trip awarded by one company to the employees of a different company.

Many companies have formal programs in place that reward employees who achieve certain goals and objectives. In some cases, rather than awarding cash, a company might award a trip to a luxury destination, often for the employee and a companion. This type of reward is an incentive payment, similar to a cash bonus. The company must report the fair market value of the trip as gross earnings on an employee's W-2. The company must also report the trip as miscellaneous income to the employee's trip companion on a form 1099-MISC.

Instead of awarding an individual trip to each trip bonus recipient, a company might invite all recipients to the same trip and run it as a company meeting. When a trip is a company meeting, it's not considered taxable income to an employee, does not affect gross income and is not reported on a W-2. As of 2014, the trip must be reported as income to the recipient's companion if the value of the companion's portion of the trip is $600 or more.

In some industries, manufacturers offer incentives to employees of other companies to sell their products and services. These incentives, called special payment incentives for fast sales, or SPIFFS, often take the form of a trip. For example, to increase sales for a specific model car, an automotive manufacturer might award a trip to a dealership's salesperson who sells a certain number of cars in that model. Because a salesperson is an employee of the dealership, not of the manufacturer, the fair market value of the trip is not reported on the employee's W-2 as gross earnings but as miscellaneous income on a 1099-MISC. Unlike wages, miscellaneous income is not subject to federal withholding tax, payroll taxes or self-employment tax.

To minimize the tax burden on employees who receive a trip as an award, some companies make an additional cash payment that's roughly equal to the amount of tax the employee will owe on the trip. This is called "grossing up" the trip. For example, if an employee receives an incentive in the form of a trip that's worth $3,000, and the employee is in a 39 percent tax bracket, the company might also provide the employee with a check for 39 percent of $3,000, which is $1,170. The gross-up payment is treated as gross income and is taxed accordingly.