Payroll Tax Guideline 109: Prizes, Gifts, and Awards Provided to Employees

Reviewed 10/1/2014

Gifts, awards, and prizes provided to employees are generally taxable income to the employee since they are presented in return for the employee’s performance or services. Cash awards and the fair market value of non-cash awards are subject to income tax withholding and FICA and should be reported on an employee’s W2, unless a statutory exclusion clearly applies.

Internal Revenue Code (I.R.C.) limitations that often apply to gifts, prizes, and awards include the following:

Gifts (I.R.C. § 274(b))

Gifts made directly or indirectly to any individual in excess of $25 per year should be considered employee income unless certain terms and conditions apply (such as being inscribed with the recipients name and not being transferable).

Service and Safety Awards (I.R.C. § 274(j))

Awards of tangible personal property given to employees for length-of-service or safety achievement are not considered employee income if the value of the award does not exceed specified limits – $400 per employee per year for all awards presented under a nonqualified plan; $1,600 per employee per year under a qualified written plan that does not favor highly compensated employees and that has an average benefit award of $400 or less per employee over the year.

De Minimis Fringe Benefits (I.R.C. § 132(e))

A de minimis fringe benefit is any property or service infrequently provided to an employee that has so little value that accounting for it would be unreasonable or administratively impracticable. Cash, no matter how little, is never excludible as a de minimis fringe, except for occasional meal money or transportation fare. Similarly, a cash equivalent (such as a gift coupon or certificate) is generally not excludible as a de minimis fringe, even if the property or service acquired (if provided in kind) would be excludible as a de minimis fringe.

Working Condition Fringe Benefits (I.R.C. § 132(d))5a)

A working condition fringe benefit is any property or service provided to an employee to the extent that, if the employee paid for the property or service, such payment could be claimed as a business deduction. In general, cash payments do not qualify as working condition fringe benefits. There are three requirements for a working condition fringe: the employee’s use of the property or service must relate to the employer’s trade or business; the employee would have been entitled to a deduction for a business expense if he or she had purchased the property or service that was provided by the employer; and the business use of the property or service must be substantiated by adequate records or sufficient evidence corroborating the employee’s own statement under the applicable substantiation requirements of either Code 274(d) or §162. [Reg. § 1.132-5a)

Scholarships (I.R.C. § 117)

When the University provides property to a student who is also an employee of the University, the issue of whether the award is compensation awarded to an employee or a scholarship awarded to a student should be considered. If the property was provided as a reward for services rendered, it should be treated as compensation. If the property was provided as an award for academic excellence, it should be treated as a scholarship. Scholarships are generally not reportable on Forms W2 or 1099, but in some cases may be taxable to the student.