Are Employee Achievement Awards Tax-Deductible?

January 29, 2024

If you would like to recognize your childcare staff with employee achievement awards, then you will want to know about IRS tax guidelines for employee awards. In the following guide, we review these tax guidelines for employers and employees, including whether employee achievement awards are tax-deductible and what kind of limitations apply. Keep reading for more information.

As a childcare business owner, you may wish to recognize your employees for an outstanding work-related achievement, a significant contribution to your company, or a major milestone.

Employee achievement awards are taxable income for your employees and must be reported on their W-2s unless they meet strict requirements by the IRS.

The Tax Cuts and Job Act states that non-tangible personal property given as an employee achievement award cannot be excluded from an employee’s income (and therefore is taxable). The IRS defines the following as non-tangible personal property:

  • ⛔️ cash and cash equivalents
  • ⛔️ gift cards
  • ⛔️ coupons and certificates
  • ⛔️ tickets to theater or sporting events
  • ⛔️ vacations
  • ⛔️ meals
  • ⛔️ lodging
  • ⛔️ stocks, bonds, and securities
  • ⛔️ other like items

In order for an employee achievement award to be considered as non-taxable income for an employee, it must meet the following IRS requirements:

  • ✅ Be given for length of service or safety achievement
    • For length of service – must be given after the employee’s first five years of employment; must not be given to an employee who has received another length of service award during the same year or in any of the four prior years; a traditional retirement award is one exception to the five-year rule
    • For safety achievement – cannot be excluded if awarded to a manager, administrator, clerical employee, or other professional employee
  • ✅ Be tangible personal property (such as a plaque, watch, fountain pen, etc.)
  • ✅Be given under conditions and circumstances that do not create a significant likelihood of the payment being disguised compensation
  • ✅ Be awarded as part of a meaningful presentation
  • ✅ Be no more than the specified dollar limits

Employee achievement awards are both tax-deductible for the employer and tax-exempt for the employee when they fall within these specified dollar limits and adhere to the guidelines listed above:

  • ✅ Up to $1,600 for awards of tangible personal property given to any one employee annually if they are a part of a written plan
  • ✅ Up to $400 for awards of tangible personal property given to any one employee annually outside of an established written plan

Your company’s qualified written plan must be approved by the IRS to ensure that it does not discriminate in favor of high-earning employees.

Finally, it is worth noting that the IRS does not require awards of nominal value to be reported as income on an employee’s W-2, nor do they count toward the $400 or $1,600 annual limits listed above. “Nominal value” can have somewhat of a subjective interpretation, but most experts agree that an award of up to either $50 or $100 should be treated as one of nominal value.

We hope this guide to tax rules that apply to employee achievement awards will help you make an informed decision when it comes time to award your childcare employees for their service.

The experts at Honest Buck are here to help you build a solid financial foundation and grow a more profitable Early Childhood Education business.

Contact us to get in touch with our team of professional accountants.

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