Rewards

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Are Employee Rewards a Taxable Benefit? A Mini Guide

At Kudos, we firmly believe that recognition is the best way to drive employee engagement and improve organizational performance. However, rewards can also be a terrific tool to enhance the employee experience.

Are Employee Rewards a Taxable Benefit? A Mini Guide

Table of Contents

Disclaimer: The advice shared in this publication is intended for informational purposes only. It does not replace the expertise of accredited professionals. Please review the governing tax laws in your jurisdiction and consult your finance team.

At Kudos, we firmly believe that recognition is the best way to drive employee engagement and improve organizational performance. However, rewards can also be a terrific tool to enhance the employee experience.

In practice, this recognition and communication first philosophy fosters connection, communication, and celebration of day-to-day contributions to significant accomplishments. We recommend that you keep the rewards component of your recognition program minimal or casual so they don't overshadow the program's goal. What people really want is to know they are valued, their work is noticed, and they belong. Rewards are nice but should not be the core focus. They should simply be a nice, low-cost benefit that reminds the team they work for a great company that cares about them.

"We recommend that you keep the rewards component of your recognition program minimal or casual so they don't overshadow the program's goal."

If you do include rewards and monetize points, The Conference Board of Canada published an excellent report for recognition and reward budgeting for a system like Kudos, casual rewards, and recognition for automated years of services and events like automated birthday recognition and rewards. The report concluded that a not-for-profit organization should budget approximately $125 per year, and for-profit organizations should budget up to $250 per person per year.

With that said, when employees redeem points for rewards like gift cards through a platform like Kudos, the tax implications are not always clear-cut. When it comes to Kudos Rewards specifically, our clients often ask, "should we consider the rewards in Kudos a taxable benefit?"

The short answer is - it depends!

What constitutes a taxable benefit differs by country, state, province, company type, and many other unique factors.

Technically most gifts given to employees (including KudosRewards™) are considered taxable benefits. That means that they are considered additional income, and the value of the reward should be included in your employee's year-end tax forms. But ultimately, this is at the discretion of your finance team. The most important thing is communicating your chosen policy to your employees so there are no surprises when the tax deduction appears on their pay stubs.

In the following mini-guide, you'll find more helpful information on where to get started when it comes to taxable benefits and Kudos, including:

  • A summary of tax implications for employee rewards in the US
  • A summary of tax implications for employee rewards in Canada
  • An overview of how existing Kudos clients are managing tax rules
  • Examples of 100% tax-free rewards in Kudos

Overview of Tax Implications for Employee Rewards in the US

As mentioned previously, generally, rewards, bonuses, and gifts are all taxable, with some limited exceptions. If you give an employee cash or a cash equivalent such as a gift card, it is taxable regardless of the amount or the purpose. Employers must record taxable income on the employee's W-2 at the end of the year.

Businesses can deduct up to $400 for all awards of tangible personal property given to any one employee annually, such as company swag and holiday gifts. Gift cards don't count as awards for this deduction because they aren’t considered personal property.

Rewards that are not personal property are considered compensation (including gift cards) and should be subject to federal and state income taxes, as well as FICA taxes (Social Security and Medicare) for both employee and employer.

Notable exceptions:

De minimis benefits: De minimis benefits are a notable exception to the rule. The IRS defines de minimis benefits as "one for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical." For example, coffee or soft drinks in the break room or company swag like coffee mugs and hoodies sent to new hires.

The IRS suggests organizations consider the frequency and value of the benefit when determining whether it can be considered de minimis.

While there is no defined amount, the general rule of thumb is that infrequent rewards below $100 per instance would be considered de minimis, which is often the case with Kudos Rewards redemptions, for example.

Suggested Further Reading:

Overview of Tax Implications for Employee Rewards in Canada

In Canada, bonuses and gifts are also generally taxable, with some limited exceptions.

According to the Canadian Revenue Agency (CRA), "a gift or award that you give an employee is a taxable benefit from employment, whether it is cash, near-cash, or non-cash."

Further, the CRA explains that cash and near-cash gifts or awards are always a taxable benefit for the employee. A gift card or experience voucher is an example of a near-cash gift.

If the benefit is taxable, it is also pensionable, and you should deduct CPP contributions and income tax.

Notable exceptions:

  • Non-cash gifts and awards: The CRA states that you may give an employee an “unlimited number of non-cash gifts and awards with a combined total value of $500 or less annually.” This means that you can give employees non-cash gifts like swag, tickets to events, or holidays, for example, without any tax repercussions up to a fair market value of $500. Near-cash gifts, like gift cards, do not count toward this exception. If the total amount of gifts exceeds a fair market value of $500, the fair market value of anything additional should be added to the employee’s income.
  • Long-service awards: The CRA also allows you to give your employees a non-cash long-service or anniversary award valued at $500, tax-free. In Kudos, these awards can be automated and are easy to differentiate on the redemption report.

Suggested Further Reading:

How Kudos Clients Do It

Generally speaking, Kudos clients approach the situation in two ways: Some do not deduct anything based on points redeemed, relying on the standard exemptions highlighted above, resulting in a tax-free scenario (e.g., de minimis benefits). The others (the vast majority) treat all redeemed points as taxable and keep the calculation and tracking simple by making the payroll deduction once per year. Sometimes clients will “gross up” the value of the reward so that the team member does not actually get the tax impact on the $100 they earned. In this situation, if an employee redeemed $100 worth of points at a 30% tax rate, you would typically have to deduct $30 from payroll. However, by increasing the reward to a value of $130 for payroll (i.e., grossing up) and then holding back the extra $30 for tax, the employee is covered for the tax required.

Kudos administrators within each organization can easily download a monthly or quarterly Redemption Report of employees' redeemed rewards in Kudos. The report allows your payroll and finance team to sort by period, people, department, and/or location. In most cases, you can map that CSV file to your HRIS to automatically update each employee's payroll information with a simple upload.

Another important note is when Kudos users use their Kudos points toward a charitable donation, your company makes the donation on behalf of that employee. So, in this case, the employee never actually receives cash at any point in the transaction, meaning no tax implications for the employee, and your company may be eligible for a tax deduction for the donation. The employee is simply asking the company to direct reward points to a charity they care about.

These are just some examples of how Kudos clients manage the tax implications of their program. Your finance team will have its own approach and preferences. Kudos is here to support along the way through reports and guidance.

Tax-Free Rewards with Kudos

In Kudos, you can decide the value of your points, who can give points, and what kind of rewards are available in exchange for points earned. If you choose to use points in Kudos but would prefer not to manage any tax implications, rewards with zero cash value are a great option.

Here are some examples of zero-cash value rewards:

  1. Lunch with the CEO
  2. An extra day off
  3. A reserved parking spot for a week in your company lot
  4. Basic company swag like t-shirts and mugs
  5. The option to donate points to a charitable organization

Key Takeaways

As a reminder, Kudos is designed in a way that points have no dollar value until they are redeemed. For instance, if an employee leaves with a remaining balance of points, they hold no value and have no tax implications. If employees redeem points for a gift card, in most cases, the value should be accounted for as a taxable benefit, i.e., as income for your employees. If the recognition program is designed on casual rewards and primarily gift cards, the annual "reward" amount will likely fall in the range of $100 to $150 USD per person per year. And so, the tax effect is often considered immaterial from an individual standpoint and possibly tax-free, depending on the country.

The most important thing is to make sure your employees are aware of the tax implications from the beginning. We suggest you make it part of your onboarding process; most of the time, it's easy to explain that perks, such as gift cards, are treated as income and subject to taxes.

Another important way to spread awareness is to add the optional taxable benefits banner on the Kudos Rewards page, which can be added automatically by your admin and reminds employees that they will be taxed on their gift card redemptions.

Finally, Kudos is a recognition-first platform – that's at the core of what we do. It's what's behind our name! If you're concerned about the tax implications of a rewards program, with Kudos, you can turn off the rewards functionality entirely without sacrificing the platform's benefits.

Disclaimer: The advice shared in this publication is intended for informational purposes only. It does not replace the expertise of accredited professionals. Please review the governing tax laws in your jurisdiction and consult your finance team.

Kudos is an employee engagement, culture, and analytics platform, that harnesses the power of peer-to-peer recognition, values reinforcement, and open communication to help organizations boost employee engagement, reduce turnover, improve culture, and drive productivity and performance. Kudos uses unique proprietary methodologies to deliver essential people analytics on culture, performance, equity, and inclusion, providing organizations with deep insights and a clear understanding of their workforce. Book your demo today!

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About Kudos®

Kudos® is an employee engagement, culture, and analytics platform, that harnesses the power of peer-to-peer recognition, values reinforcement, and open communication to help organizations boost employee engagement, reduce turnover, improve culture, and drive productivity and performance. Kudos® uses unique proprietary methodologies to deliver essential people analytics on culture, performance, equity, and inclusion, providing organizations with deep insights and a clear understanding of their workforce.

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