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3 Reasons Cash Isn’t King When it Comes to Service Awards

Many employers assume their employees prefer cash as a reward or they think giving a little extra in the employee’s paycheck is easier than giving a service award gift.  But when it comes to rewarding your employees, you have to take tax laws as well as the perceived lasting value of cash into consideration.  Here are three things to think about as you weigh your options on how to reward your employees:

Strict Tax Laws

According to the IRS website, publication 15-A: “To be excludable from your employee’s gross income, the award must be tangible personal property–not cash, gift certificates, gift cards or securities–given to an employee for length of service or safety achievement, awarded as part of a meaningful presentation, and awarded under circumstances that do not indicate that the payment is disguised compensation…The most that you can exclude for the cost of all employee achievement awards to the same employee for the year is $400. A higher limit of $1,600 applies to qualified plan awards. Qualified plan awards are employee achievement awards under a written plan that does not discriminate in favor of highly compensated employees. An award cannot be treated as a qualified plan award if the average cost per recipient of all awards under all of your qualified plans is more than $400.”

What this means in plain English:

  • If you are currently awarding your employees with cash or cash equivalents (gift certificates/gift cards), it is considered compensation by the federal government and is taxable income.  Therefore, if you want to give your employee a cash award, you will either have to pay more on your employee’s gross pay to cover the tax obligation or your employee will be taxed on their reward.
  • Non-cash rewards (excluding gift cards and certificates) valued up to $1,600 per employee per year are non-taxable, as long as they are given within a meaningful presentation, to ALL qualified employees, for accomplishments in years of service or safety.  The average cost for each gift in this circumstance cannot exceed $400.
  • Gift awards are also tax-deductible as a business expense to the employer–refer to IRS Publication 535 “Business Expenses” for more information.

Cash and Gift Cards Come with Some Baggage

Sure, a little extra cash might be nice for your employee to pay off some bills, but it will soon be forgotten.  There is no long-term value or significance tied to cash for the employee.  In addition to keeping with the tax laws above, consider the following:

If the employee never redeems the card, then you are out of the money with no gift to the employee.  According to a study by Consumer Reports, unclaimed, lost or expired gift cards cost consumers a staggering $8 billion, just in one year! Make sure your gift is one your employee truly wants by allowing them to choose with award gift selections.

You have to pay for the gift cards up front—and your employees are out of luck (and you are out of money) if the store goes out of business or files bankruptcy.  (Think of some major chains over the past few years—Blockbuster, Circuit City and Sharper Image, just to name a few.)  Most service award companies invoice you only when they fulfill the employee’s gift request—be wary if they don’t.

If you give a gift card to an employee with no interest in using it, then they can sell it on eBay, or trade it on sites such as swapagift.com and plasticjungle.com.  There is no emotional attachment or trophy value tied to your gift.

Don’t Forget the Presentation

Remember the tax code above, “…the award must be tangible personal property (not cash, gift certificates, or securities) given to an employee for length of service or safety achievement awarded as part of a meaningful presentation…”  It also needs to be something that cannot be converted to cash and something the recipient will remember and value.

A “meaningful presentation” does not have to break your budget.  You don’t need a fancy awards banquet with a sit-down dinner.  You can simply set aside time to present the awards to your employees.  Or, if you are having the employees pick out their own awards, give out the award information in nice presentation folders during a morning meeting with coffee and pastries.  Whatever you decide, make sure it is something special for your employees, but also works within your budget and your business schedule as well as employees’ personal schedules.  Your service awards vendor should be able to help you with all the details of a “meaningful presentation.”

ABOUT THE AUTHOR
Craig Ainsworth is Vice President of Sales and Marketing at Eagle Recognition.  Eagle Recognition offers turn-key solutions for length of service award programs.

You can reach Craig at by calling (888) 287-4240 or via our contact form.