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5 min

Are Employee Rewards a Taxable Benefit? A Mini Guide

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.

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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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5 min

How Important is Salary (And How Can You Improve Your Approach)?

How Important is Salary (And How Can You Improve Your Approach)?

It’s an age-old question we’ve all pondered before but one for which we rarely arrive at a cohesive solution. “How important is salary?”

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It’s an age-old question we’ve all pondered before but one for which we rarely arrive at a cohesive solution.

“How important is salary?”

If you’re an employee or job seeker, this question is important to you for reasons that go beyond employment.

If you’re an HR professional, leader or recruiter, this question is important from a company success (and budget) perspective.

But regardless, the question itself is always a crucial one.

Salary will matter to people for a plethora of reasons, despite the fact that it may not always be the primary (nor even the secondary or tertiary) motivation for accepting a job offer or staying in a role.

Job security, benefits, company culture, travel, company reputation, career development and more all play a significant role in determining why people choose to remain with their organizations, and yet, salary is always a factor.

It’s fair to say, then, that the question of salary and its importance is certainly not black and white, but how far does its influence reach when you take a job or stay in your existing one?

And if salary can’t motivate employees to do their best work the way people assume it traditionally has, what’s the solution?

Let’s break this whole thing down further!

We know salary matters, but how much?

Ask anyone in your workplace how much they make, and you’ll likely be met with horrified stares.

You simply do not ask colleagues how much they make.

This rule of thumb is commonly known; few people in an office or company will openly discuss nor admit to their earnings, because it’s uncomfortable. What if you make more than the person sitting next to you, or earn less commission than your colleagues on a sales team?

Further, what if you’re ashamed of how much you make, not because it’s too little, but because it’s too much? Or vice versa?

There are treasure troves of reasons why we don’t ask one another about salary.

Interestingly enough, however, salary is one of the first elements people consider when looking at job postings or negotiating job offers. As much as we’d like to believe that company culture, benefits, time-off, and other upsides can make up for a less than desirable salary, we all want to think about things like putting food on the table, affording rent, or being able to get to work every day.

Millennials are a great example of this. 44% of millennial employees feel salary is important when it comes to attracting talent, second only to career development.

From an employee perspective, the salary range for a role could easily determine whether you’re ready to take the leap and accept a job offer or keep looking.

But for companies, salary often comes down to statistics, averages, and what the company feels the role is worth.

So there’s a disconnect between what employees want and need versus what companies must do to ensure they hire the right talent without overpaying or overcompensating.

Compensation comes in many forms

Salary is only one part of most companies’ compensation model.

We can’t forget commissions and bonuses, nor can we ignore benefits or allowances.

That means that, for many roles, salary isn’t simply the total annual income you bring home. It can also include things like monthly wellness allowances, a great benefits package, quarterly or yearly bonuses and more.

And while not every company will offer the same salaries, benefits or bonuses, compensation isn’t always as clear as we think.

For example, you could make $45,000 a year as a teacher, but your partner could be a hedge fund manager bringing in $120,000 annually. Despite that, you could be incredibly satisfied teaching young children, while your partner may be disengaged and detached from their work.

It’s why salary doesn’t always equal happiness, but other forms of compensation may.

According to Gallup, the ‘magic number’ when it comes to salary is $75,000, but surprisingly, those who earn more don’t necessarily report being happier, both personally or professionally.

Further, how a company compensates its employees doesn’t always boil down to the number on a paycheque.

An organization may provide lunch every Friday for their entire team, or give a monthly $500 wellness allowance that employees can use on gym memberships or hiking gear. Those initiatives can quickly add up to the tune of thousands of dollars a year, but could entice employees to stay with their organization even if their salary range is lower.

Those perks or alternative compensation models matter. Consider the fact that 72% of millennials have made some sort of compromise when entering the workforce, with one-third taking a lower salary to land a job. What may seem like a low and undesirable salary situation can be helped by other bonuses that aren’t necessarily monetary (like your company culture).

How you determine salary counts (and not just for your bottom line)

When you think about salary, what first comes to mind?

For many of us, it’s the amount of money we make annually, but salary range differs based on roles and responsibilities.

Put simply, salary range is the range of pay companies establish to pay an employee who performs certain functions or tasks.

When determining salary range, typically there is a minimum pay rate and a maximum pay rate, accompanied by variances in scale depending on things like promotions, industry averages or increases, etc.

If you’re looking on Glassdoor to figure out the salary for, say, a content marketer in Vancouver, British Columbia, the average salary reported by that platform is $52,000 annually. Yet, a company may choose to advertise a content marketer role with a salary range of $50,000-$55,000/year.

That range is dependent on things like market pay rates, industry averages, education, skill level, and more. Thus, a role’s salary range can change in relation to the employer’s needs. Not so surprisingly, salary ranges can also be impacted by location!

When determining salary for a new role, employers have to take into account traditional considerations, such as:

  • Market research
  • Industry statistics
  • Location and demographics
  • Company need/necessity
  • Skills, education, experience

However, employers are increasingly having to also consider what will motivate the right talent to not only choose their company as a prospective employer but ultimately apply and accept a potential job offer.

Which leads me to our next point…

How do you go beyond stats and research to find the right people?

Salary and compensation can only entice people to a certain extent, which means if you’re hoping to motivate the right people to join your company using compensation as part of your proposition, you’ll need to make it worth someone’s while.

Determine what your salary philosophy is

Most companies operate using either a base salary or a variable salary.

Base salary refers to a fixed amount of money that employers pay to employees based on their job functions, whereas variable salary or pay denotes compensation that varies based on different factors (like job performance, sales, etc).

Base salary is more common to larger organizations or those which are well established, but regardless, your company has to determine how it prefers to provide compensation.

If you like the option of being able to raise salary levels for high-performing team members, for instance, in times of promotion or negotiation, base salary may be preferable. It comes down to what a company feels will motivate their target applicant to apply.

Consider the competition

Beyond market research or role averages, you may want to consider how competitive your company is in relation to your competitors.

If you’re a tech startup that creates food delivery apps for clients, for example, you’ll probably look at similar startups in your city or region that offer similar services, are of similar company size, and have similar team structures.

So, when it’s time for you to hire a Change Management Coordinator, you’ll know how competitive you have to be with salary and compensation to ensure your company stands out (and feels like the right choice for potential employees).

Don’t forget to reiterate the big picture

When candidates first look at a job offer, the salary may seem like the key differentiator between accepting a role or declining it for another. But it’s important to consider the bigger picture.

A match in retirement funds or great benefits and office perks may be enough to compensate for a salary that applicants aren’t totally on board with, especially if there is no room to negotiate.

At the end of the day, a salary is unlikely to be the sole reason someone accepts a job offer or applies to your company, so it’s a good rule of thumb to keep in mind how applicants perceive your organization and what you can offer that moves beyond monetary compensation.

Evaluate your benefits and perks

When was the last time you asked your employees about their benefits and organizational perks?

It sounds like an odd concept, but gathering feedback from the people who actually use the benefits your company offers can be incredibly useful in determining how you can streamline the non-salary compensation you offer future employees.

Part of that non-salary compensation can include engagement initiatives. When employees are unhappy or actively disengaged at work, up to 54% consider leaving their existing companies for a different job, which indicates that keeping employees engaged at work could keep them...at work!

Part of the ‘perks’ of working at your company could include a highly engaged culture, where employees can collaborate and do their best work. Such perks can also compensate for lower or less sought-after salary ranges!

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5 min

What Is An Employee Value Proposition And Why Does It Matter?

What Is An Employee Value Proposition And Why Does It Matter?

When it comes to assessing the value of a new career opportunity, employees will evaluate companies the same way they evaluate products. How are companies matching up in the eyes of potential employees?

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When it comes to assessing the value of a new career opportunity, employees will evaluate companies the same way they evaluate products. How are companies matching up in the eyes of potential employees?

More companies like Glassdoor are allowing for the honest, open, and uninhibited review of organizations globally. Many employees (both previous and current) take advantage of the unique opportunity to anonymously pick apart or praise companies.

Organizations may be grateful yet apprehensive of such platforms - the potential to receive both positive and negative reviews from happy or disgruntled team members can be scary! Candidates are quick to peruse platforms like Glassdoor to gain a better understanding of a company's culture and what it's like to work at an organization.

When a company hires and onboards employees who achieve their goals and produce successful outcomes, they undoubtedly look for the same qualities in potential candidates when hiring for other roles.

"An employee value proposition (EVP) is an all-encompassing offering of what employees can expect to gain or benefit from when working for your company."

That’s perfectly understandable; what organization doesn’t want productive, contributive and passionate teams?

But not every company knows how to attract and retain those types of employees - the ones who show up because they want to, not because they need to. What do some of the world’s most successful companies, like L’Oreal or Apple, do to entice the best candidates and retain their top talent?

It starts with an EVP.

What exactly is an ‘EVP?’

You may have heard of the term ‘value proposition,’ which refers to the key differentiator and offering of a company that promises something of value to be delivered to its customers.

However, a value proposition isn't the same as an EVP. Any organization should design its value proposition with its customers in mind, but the EVP needs to be designed and customized with their employees in mind.

Put simply, an employee value proposition (EVP) is an all-encompassing offering of what employees can expect to gain or benefit from when working for your company.

Traditionally, EVPs comprise benefits (think: medical or dental), rewards, and ‘perks,’ such as extended vacation days. EVP is one of the most important factors companies have to consider when it comes to the recruitment and retention of employees.  

In the modern workplace, the EVP could include both traditional benefits in addition to elements that positively impact one's work-life balance and professional environment. Benefits can range from remote work options and time-off during the workday to attend fitness classes, to learning and development opportunities, a collaborative working environment, and more.

Why should you focus on your company’s EVP?

Before considering the 'why' behind an EVP, it's helpful to first look at how an EVP should function.

What an EVP ultimately boils down to is its relatability - a company’s EVP should win the hearts and minds of employees by connecting with them on both a rational and emotional level.

From a company perspective, that means clearly and consistently relating the values and vision of your company, both with current and prospective employees. For employees, it means looking closely at what you want in and out of your company, and evaluating whether your organization fulfills your personal and professional needs.

Organizations that proactively focus on an efficient EVP experience between 30-40% more commitment from their teams than those that don’t, which points to one of the most significant and common organizational woes: retention.

Here are a few stats that may surprise you about the employee value proposition:

It's fair to say that a compelling EVP can assist organizations in hiring the right employees while also reducing turnover. These are two significant challenges most C-suite and organizational leaders face today.

Beyond those two elements, an EVP is critical for ensuring people want to work for your company. Leaders can no longer ignore that candidates evaluate companies the same way they do products. This forces organizations to dive deeper into what they can offer people as opposed to looking solely at what people can offer them.

"Candidates evaluate companies the same way as they do products, which forces organizations to dive deeper into what they can offer people as opposed to looking solely at what people can offer them."

According to a recent survey from Glassdoor, company mission and culture matter more than salary. So much so, that 77% of adult candidates consider a company’s culture, and 79% consider its mission and purpose, before applying. This is especially true for millennials, which Glassdoor found prioritize culture over salary.

Culture is an intangible component of an organization's EVP, and people care about workplace culture, perhaps now more than ever before.  

That brings us to our next point!

What does your company’s EVP need to succeed?

Only 2 in 5 employees believe their current organization has an effective and attractive EVP.

Meanwhile, only 44% of CEOs and C-suite executives feel their company has a managed EVP and are less likely than employees or HR professionals to know whether their company employs it. In contrast, 60% of CEOs believe they are responsible for the overall branding of their organization.

An EVP needs to be unique, relevant, and realistic for it to help attract, retain, and engage employees. However, like any initiative, an EVP only works if the leadership behind the company employing it also believes in it.

Don't forget that the EVP is on the employer, not the employee. When employees have the support and tools they need to succeed, they are more likely to be engaged and productive. However, the responsibility of developing a purposeful EVP rests with the organization, not the employee. While the term 'employee engagement' refers directly to the employee, without the resources and encouragement from leadership to succeed, employees can't engage.  

There are a few key elements you can consider when improving your EVP...

Start by asking your employees what they need

Most EVPs revolve around the perceptions, opinions, and feedback of existing employees, and rarely take into account those of past or potential ones. Leaders have to consider what past employees felt was lacking, and how prospective employees may feel. Glassdoor, for example, allows leaders insight into what employees think of a company's culture, salary ranges, development and advancement opportunities, leadership, and more.  

Organizations can start by surveying current employees and asking what types of benefits they need as well as those they would 'like to have' (like fitness passes or free parking). These insights can be compared to what previous employees have said through past surveys or reviews (through platforms like Glassdoor) to streamline the benefits and offerings of an EVP.  

Consider your company’s culture

Not every employee works or performs tasks in the same manner, nor will every employee need the same thing from a working environment to be successful. Some can function with the bare minimum, while others may find that time for play (such as having a ping-pong table in the office) stokes creativity and collaboration.

It's important to remember that employee value propositions inherently consider every aspect of what will make an employee want to join, then remain with your company. So, your EVP will need to evolve to accommodate different working styles and needs, based on the type of employees your organization is looking to hire. If you factor this into your EVP, you're well on your way to improving your strategic approach to hiring!

"It’s important for an EVP to be unique, relevant, and realistic in order for it to be a key factor in your company’s strategy to attract, retain, and engage employees!"

Be flexible and agile

The best organizations are agile ones, able to adapt naturally and strategically to change as well as the pain points every company faces as they grow and evolve. The same should go for your company's EVP. You'll need to segment and customize your EVP based on the target audience or type of employee you're looking to attract.

That means being flexible with your offerings and adaptable to the changes and trends in labour markets and workforces.

Always incorporate recognition

At Kudos, we're adamant about our recognition strategy, and not just because we develop recognition-first software. Recognizing and acknowledging others' contributions and dedication not only improves engagement but motivates employees to do their best work. Recognition should be a cornerstone of any EVP as it is a crucial part of your overall workplace culture. By incorporating recognition into your EVP, both existing and potential employees can see the value in working with your company (because they'll be valued, in turn).

Development

89% of leaders believe their employees quit because of money. While salary plays a significant role in employees hopping on board, it is no longer the sole deciding factor. Many millennials report development opportunities are a key driver in their decision to join a company. By including development in your EVP, you're signifying to employees that you care about their career trajectory, advancement and promotion!


89% of executives expect an increase in the competition for top talent. With that increase comes the need for organizations to truly stand out among the countless others competing for the best employees. Is your EVP working for your company’s hiring strategy, or against it?

Listen to this article from our conversational blogcast, Kudos® Corner!

Kudos-Corner-Employee-Value-Proposition.mp3

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