Chapter 17. Tax Implications for Non-Monetary Awards
Government-wide regulations on awards at 5 CFR 451 include a provision that requires agencies to comply with all applicable regulations when conducting its awards program. This requirement includes regulations that address the impact of the various tax laws on the Government Awards program, as prescribed by the Internal Revenue Service. The following is information on the impact of taxes on awards:
Cash awards and cash equivalents provided by the employer to the employee are always taxable regardless of the amount and are subject to federal, state, local, and FICA taxes. However, most nonmonetary awards used in the Government may not be considered taxable.
Taxing Non-monetary Awards
A non-monetary award (i.e., honorary award or informal recognition award) is considered to be a fringe benefit and can be tax exempt if it meets two conditions:
- When it is a de minimis fringe benefit, and
- When it meets the definition of "employee achievement awards" and does not exceed the employer's deduction limits.
Determining Whether a Non-monetary Award is de minimis
The Internal Revenue Code defines a de minimis fringe benefit as an item which, taking into account the frequency with which it is given, has a value so small that accounting for it is unreasonable or too administratively impracticable (26 CFR 1.132-6(a)). No specific dollar amount is defined as de minimis by the Internal Revenue Service. The determination as to whether honorary awards might be considered de minimis is based on the fair market value of the item given. "In general, fair market value is determined on the basis of all the facts and circumstances. Specifically the fair market value of a fringe benefit is the amount that an individual would have to pay for the particular fringe benefit in an arm's length transaction."
An example of informal recognition awards that could be considered to have a de minimis fair market value might be ballpoint pens, mugs, or desk clocks, with a team motto or Departmental logo that are given to employees for completing an assignment ahead of schedule or under budget. The fair market value of the item given to each employee is very small and administratively inefficient to report it as a part of the employee's gross income and wages.
Effect of Employee Choice
The element of choice plays a significant role in determining whether a non-monetary award can be considered to be a de minimis fringe benefit and tax exempt. The Internal Revenue Service considers giving an employee significant choice in what they actually get as an award (i.e., gift certificate or catalog category), equivalent to giving them cash which is taxable and reported as gross income and wages. When there is a very limited choice among two or three items of nominal value in a particular award category, the award can normally be considered to be a de minimis fringe benefit and exempt from taxation.
If an employee is given a choice between a cash award, time-off award, merchandise item, or Quality Step Increase (QSI) and the employee does not choose the cash, the employee is considered to be in constructive receipt of the cash and taxes must be withheld based on the cash award considered. Therefore, supervisors and managers generally should not attempt to give employees a choice.Any attempts supervisors and managers make to find out employee preferences, in order to carry out a more effective awards program, clearly should be made separately from granting any actual awards and should not be accompanied by any stated or implied award amounts. In these cases, agencies can determine employee preferences without implying that an award will be given, much less offering the employee a bona fide choice between two forms of an actual award. For example, polling the staff on what types of awards they would determine as meaningful to them would not be considered constructive receipt of cash by any employee.
Tax Exclusions for "Employee Achievement Awards"
The second basis under which a nonmonetary award might be tax exempt is if it is defined as tangible personal property given as part of a meaningful presentation, and not as disguised compensation, in recognition of length of service or safety. These are not cash awards.
Withholding Income Tax and "Grossing Up"
When a nonmonetary award cannot meet the criteria for de minimis fringe benefit or an "employee achievement award," then the item must be reported as gross income and wages, and the applicable taxes withheld.
It is the agency's choice whether to "gross up" the employee's wages in order to cover the employee's taxes due (i.e., income taxes and the employee's share of FICA taxes) on an award. "Grossing up" has been recommended to avoid diminishing the value of the award to the employee. Agencies with delegated authority should develop their own policy on whether to "gross up" taxable nonmonetary awards, and if so, whether for all awards or for those above specified amounts. If agencies decide to "gross up" nonmonetary awards, such expenditures would be authorized as part of the expenses incurred for the honorary recognition of the employee.