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Taxation Considerations [Infographic]

Offering employees rewards and sales incentives is an important part of engagement and job satisfaction. However, it can be difficult for employers to know the right approach to take for implementing reward programs, especially when federal and state laws and regulations constantly seem to change. Fortunately, familiarizing themselves with taxation requirements can significantly help corporate […]

Offering employees rewards and sales incentives is an important part of engagement and job satisfaction. However, it can be difficult for employers to know the right approach to take for implementing reward programs, especially when federal and state laws and regulations constantly seem to change. Fortunately, familiarizing themselves with taxation requirements can significantly help corporate leaders in the execution of effective incentive and reward programs.

Income tax
There are a wide range of rewards that businesses can provide team members, such as gift cards, travel points and merchandise. In the United States, most of these offerings are considered taxable income. When used as a compensation benefit, employers are required to report them as such in either the worker’s paycheck or 1099-MISC form each year. To reduce the severity of the income tax, companies can “gross-up,” which means they pay the employee an additional amount to balance the tax liability.

Tax exemption
Many organizations want to reward team members for dedicated years of service. To celebrate an employee’s loyalty to the company, employers can reward an individual with tax-exempt compensation. However, there are limitations. Businesses will not face any tax liability for this type of reward as long as the awarded limit does not exceed $400 per five years of service. The same applies to safety rewards.

Companies that utilize sales incentives and employee reward programs are responsible for properly documenting and reporting each occurrence of one being distributed and redeemed. In addition, they are expected to calculate the Fair Market Value and maintain compliance with all necessary laws and regulations.

Failing to properly adhere to these requirements can lead to an array of liabilities and penalties. To ensure employee reward programs are accurately executed, it is highly recommended that businesses work with a recognition solutions provider that can help them navigate state tax-inclusive pricing law. Partnering with an industry expert to handle this complicated process will enable employers to focus on other critical aspects of business.

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