Employers often give employees bonuses for such things as meeting sales goals, holiday gifts, or doing something exemplary in their work performance. Many times they are not aware that some of these payments can be taxable and should be included in the employees’ payroll checks for proper tax withholding. Following are types of bonuses given and information on if the payments should be taxed when paid.
Bonuses/Awards: Bonuses or awards paid for outstanding work are included in income and should be shown on Form W-2. These include prizes such as vacation trips for meeting sales goals. If the prize or award is goods or services, the fair market value of the goods or services must be included as income.
Length of Service Awards: If tangible personal property (other than cash, a gift certificate, or an equivalent item) is given as an award for length of service or safety achievement, you generally can exclude its value from your employee’s income. The award must be given as part of a meaningful presentation, under conditions and circumstances that do not create a significant likelihood of it being disguised as pay. However, the exclusion does not apply to the following awards:
- A length-of-service award if you received it for less than 5 years of service or if you received another length-of-service award during the year or the previous 4 years.
- A safety achievement award if you are a manager, administrator, clerical employee, or other professional employee or if more than 10% of eligible employees previously received safety achievement awards during the year.
Holiday Gifts: If you give employees a turkey, ham, or other item of nominal value at Christmas or other holiday, do not include the value of the gift in their income. However, if you give cash, a gift certificate, or a similar item that can easily be exchanged for cash, you include the value of that gift as extra salary or wages regardless of the amount involved.
Make sure when giving bonuses/awards to employees that you include in wages as required by IRS and state tax guidelines the value of the gift. Most items are taxable and need to be paid through payroll and included in the W-2 form.