As a general rule, bonuses and gifts are taxable with some limited exceptions. If you give an employee cash or a cash equivalent such as a gift card as a service award, it is taxable regardless of the amount or the purpose. Taxable income must be reported on the employee's W-2 at the end of the year.
Under certain conditions, there are awards that do not have to be considered taxable income. For service awards, the value of up to $400 can be excluded from income for awards given to employees for length-of-service if certain criteria are met:
- The gift must be "tangible personal property," which excludes cash or cash equivalents, securities, vacations, lodging, meals, tickets to theatres or sporting events.
- The award must be presented as part of a "meaningful presentation." The presentation does not have to be elaborate, but emphasis must be put on the employee's achievement.
- The award must be presented under conditions that do not create "disguised compensation."
- Length-of-service awards must not be presented to employees for less than five years of service.
- The employee may not receive another length-of-service award (other than one of very small value) during the same year or have received an award in any of the prior four years.
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