Employee achievement awards – the tax issues

Many large medical practices give out employee achievement awards annually (some even monthly). Are you aware of the tax issues related to these awards? The IRC Section 274(j)(3) defines "employee achievement awards" as tangible personal property, which is transferred to the employee for length of service achievement or safety achievement. Each must be awarded as part of a meaningful presentation and should not be disguised compensation. Employee achievement awards not given under a qualified plan may not exceed $400 (when added to the cost of all other awards made to such employee which are not qualified plan awards) per employee during a calendar year to be excluded from taxable wages to the employee. (IRC Section 274(j)(2); IRS Proposed Treasury Regulation 1.274-9). "Qualified plan" employee achievement awards when added to the cost of all other employee achievement awards made to such employee (including employee achievement awards which are not qualified plan awards), are not taxable up to $1,600 per employee during a calendar year. (IRS Proposed Treasury Regulation 1.274-9).

Qualified Plan Defined

The term "qualified plan award" means an employee achievement award given as part of an established written plan or program of the taxpayer which does not discriminate in favor of highly compensated employees. (IRC Section 274(3)(B)).

Length of Service Awards

To be considered a length of service award, the employee cannot be presented the award if they have been employed for less than 5 years. Also, the length of service awards must be given at least five years apart to qualify as nontaxable. (IRC Section 274(j)(4)).

About the Author

Reed Tinsley CPA

This article is written by Reed Tinsley, a Houston, TX-based CPA with over 30 years of experience advising physicians and medical practices across Texas and the United States. Reed holds certifications as a Certified Valuation Analyst (CVA), Certified Healthcare Business Consultant (CHBC), and Certified Financial Planner (CFP), specializing exclusively in the healthcare sector. He is a published author, nationally recognized speaker, and trusted advisor to physicians on accounting & tax, practice management, and financial planning. Schedule a Free Consultation.