Recently, the tax rules regarding non-cash gifts and awards given by employers have been updated. To understand the changes, let us take a look at the different types of ways employees maybe be rewarded by employers.
Gifts are given to an employee for a special occasion. Awards is given for a work-related accomplishment, beyond the scope of the employees job description like outstanding services. An award may be given for years of service or given in a manner that is not common, like a draw, nomination process, or an evaluation, and the award is not given to many recipients.
If the gift or award is cash or akin to cash it is taxed like income. If the gift or award is not cash and the fair market value of the item is below $500 it is not taxed. Once the combined total of the gifts and awards exceed $500 at fair market value, then tax will be applied.
There are a few exemptions:
- If a gift or an award is given after an evaluation process and there are a limited number of recipients, the amount is not taxable.
- If the gift award was given for years of service, then the fair market value does not get linked with other gifts. However, the years of service must be for five or more years, and the recipient may not have received another award for years of service within the previous five years with the same employer. This is a new update.
- Trivial items like a cup of coffee, a mug, or t-shirt are not included in combined total of non-cash gifts.
Included in the recent update are specific guidelines about gift cards, along with gift certificates and chip cards. They are considered “non-cash” if the card comes with money on it, it may only be used from a single retailer or a set group of retailers, and their terms and conditions of the card clearly state the amount loaded on the card may not be converted into cash.