There’s really nothing more valuable to a business than good employees, particularly those who stick with you for years and years. One way to honor those longtime employees is to give them a meaningful present or award. The tax code includes a special carve-out for “employee achievement awards,” which means that when you buy something for your employees in recognition of their years of service, you get a tax break—and your employees do too. You can deduct the cost of the gift, and the employee pays no tax on it.
You can give the length-of-service award to an employee every five years. That is, an employee must have worked for your company for at least five years before you can give him or her one of these awards, and you have to wait at least five years before you can give that same employee the next such award.
So, what kind of award qualifies? There are four requirements:
- Tangible property. The award must be tangible property—not cash or a cash equivalent. Think things like watches, cookware, and televisions.
- Meaningful presentation. You must give the award during a “meaningful presentation.” That doesn’t mean you have to put up streamers and serve champagne, but you should have some sort of “ceremonious observance” in which you recognize your employee for his or her service.
- Deduction limit. In general, tax law limits the deduction for achievement awards to no more than $400 per employee per year.
No disguised compensation. You can’t cut the employee’s salary to make up for giving a tax-free achievement award, nor can you give the award as a disguise for normal compensation.