The Tax Implications of Employee Awards

Company giving employee awards that have tax implications.

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Giving awards to employees is great motivation and improves employee morale. But there are limits to how much you can deduct for these awards, including employee achievement, safety, and service awards. You also need to know the tax implications for employees of these awards. If they are taxable, you must deduct payroll taxes from the award.

Key Takeaways

  • Employee achievement awards are defined as an award given for service or safety as a part of a meaningful presentation.
  • Employers can deduct up to $400 for any one employee each year.
  • Awards cannot be cash or cash equivalents such as gift cards.
  • Employees are not taxed for the value of tangible awards if it meets certain criteria.

Deducting Employee Achievement Awards

Businesses can deduct certain award costs, but there is a limit.

You can deduct 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 or $400 for awards outside of an established plan. You may qualify to deduct more if the award is a part of a written plan.


The awards must be for safety or length of service achievements as a part of a meaningful presentation and are not disguised pay.

For example, you can deduct the cost of a watch for 30 years of service or a plaque for a safety award. This limit does not apply to awards made as part of a qualified retirement plan.

The IRS has special rules for employee achievement awards made by partnerships.

In this case, the deduction limits "shall apply to the partnership as well as to each member thereof." The purpose here is likely to avoid having the partnership get around the rules by having individual partners offer the awards.

Defining Tangible Personal Property

Tangible personal property is a property that is owned by an individual or a business that is movable and is not land or buildings. So a plaque or a watch would be personal property. Cash and cash equivalents such as gift cards are not classified as personal property.


Other items that are not qualified as personal property include vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds and other securities, according to the Internal Revenue Service (IRS).

You can provide a catalog of products and allow the recipient to choose one since the products are tangible personal property. These catalogs often have different cost levels for different lengths of service; more costly gifts for longer service.

Service, Safety, and Suggestion Awards

If you want the awards you give employees to be non-taxable to them, make sure that you have followed all IRS regulations.

Length-of-service awards may be non-taxable to employees if: 

  • They are not "disguised pay"
  • They are given as part of a written "qualified" program
  • They don't favor highly compensated employees
  • They don't exceed $400 per employee for non-qualified plan awards, and they don't exceed a total of $1,600 a year for all awards of any kind. 
  • Length of service awards can't be received during the recipient's first five years of employment, or more often than every five years.

Safety awards, to qualify as non-taxable, (a) cannot be given to more than 10% of the employees, and (b) can't be given to managers, administrators, clerical employees, or other professional employees.

When Employee Awards Are Taxable to Employees

The cost of tangible personal property awards under the limits set by the IRS is not taxable to the employee.


All other awards are considered compensation, including awards of travel and gift certificates, and are subject to payroll taxes. You must withhold federal and state income taxes from cash awards, and these awards are subject to FICA taxes (Social Security and Medicare) for both employee and employer.

However, if your tangible awards to an employee exceed the business deductible threshold of up to $400, they do have to include the overages in their income when filing taxes.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Internal Revenue Service. "Publication 535 (2021), Business Expenses."

  2. U.S. House of Representatives. "26 USC 274: Disallowance of Certain Entertainment, Etc., Expenses."

  3. Internal Revenue Service. "Publication 525 (2021), Taxable and Nontaxable Income."

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