Prizes and Awards
Under the federal payroll laws, prizes and awards given by employers are generally included in wages and subject to income and employment taxes. There are some exceptions.
Cash awards to employees for their suggestions on improving efficiency, perfect attendance, etc., are subject to withholding, since the awards are made in connection with and as a result of an employment relationship.
Employee Achievement Awards
Exempt are awards of tangible personal property (not cash or securities) given to an employee for length of service or safety achievement, awarded as part of a meaningful presentation, and awarded under circumstances that do not indicate that the payment is disguised compensation. The most that can be excluded for the cost of all employee achievement awards to the same employee for the calendar year is $400.
To satisfy the "length of service" requirement, the employee receiving the award must have at least five years of service for the employer and must not have received a "length of service" award from the employer during the same year or any of the last four years. To qualify as a safety achievement award, eligibility for the award must be limited to employees whose job duties involve safety issues. Awards to managers, professional employees, and clerical employees do not qualify for tax treatment as safety achievement awards because their job duties do not involve significant safety concerns.
Cash, gift certificates, or similar items readily convertible to cash do not qualify as employee achievement awards, because they too closely resemble cash compensation. Awards of bonds, event or cinema tickets, and similar items (i.e., items that provide intangible rights, such as the right to receive interest, attend a movie, etc.) are ineligible for special tax treatment as employee achievement awards because an award must be tangible property.
Charitable Achievement Awards
Awards for scientific, charitable, religious, educational, artistic, literary, or civic achievement are not includable in income if the recipient assigns the award to a tax-exempt charitable organization or governmental unit. To qualify for the exclusion, the recipient must make a qualifying designation in writing within 45 days of the date the prize or award is granted.
Payments In Lieu of Compensation
Whether a prize or award is additional compensation to the employee depends on the specific facts in each case. Unless it can be clearly shown that the award was given because of the employer's detached generosity and in no way represented compensation for services rendered, the value of the award must be included in the employee's income.