When a company awards a top performer with a new flat-screen television or a trip to Las Vegas, taxes might not be top of mind. But anyone who plans incentive programs needs to review tax considerations related to incentive awards and take steps to avoid potential tax problems.
Whether the awards are cash, travel, or merchandise, they are taxable as ordinary income, including Social Security tax and unemployment tax. Employees must report the fair market value of their awards on their annual W-2 forms, while independent distributors, dealers, or other contractors must do the same on their 1099-MISC forms if the value of the awards surpasses $600 for the year.
“I can do a round of golf with distributors, and I may need to have a 1099 form from each attendee,” says Kevin Fletcher, president of Eden Prairie, MN-based Incentives Marketplace.
Determining the fair market value of awards is a mix of art and science, but awarding travel and merchandise rather than cash bonuses often can save a company tax dollars. George Delta, executive director of the Incentive Federation, suggests that 70 percent of an award’s sale price is a reasonable value to report for merchandise, taking into account that costs for incentive program management and merchandising services are expenses that retailers do not incur and pass on to their customers.
Similarly, the fair market value to report for a group travel award, after subtracting the costs of a tour director, food and beverage, and other charges that an individual traveler would not incur on the same trip, is 75 percent of the trip’s value. There are no group-travel expenses associated with the price of an airplane ticket, so no deduction can be applied here.
Jon Kaufman, principal of KL&P Marketing and Motivation, in San Carlos, CA, points out that parts of a trip related to training and meetings are not taxable, but planners must be smart when making judgment calls. “You have to weigh and justify what part of the incentive event was business. How long were the meetings?” he says. “There are so many different twists; that’s why it’s important to have a tax attorney.”
“Taxation plays a huge role in any incentive or recognition program. Tax considerations in all jurisdictions need to be thought of up front, before you design any program,” says Janet Skolud, senior manager of human resources for TD Bank Group. “You can’t paint tax rules with a broad brush.”
Fletcher says local taxes have to be given special consideration. Things get even more complex when dealing with global programs.
“If the incentive house is marking it up and you add in shipping, a $1,000 set of golf clubs being sent to Germany might cost $2,000 by the time it gets there,” says Fletcher. “It’s important to do your research or work with an expert. All awards are not equal when you start looking at taxes.”
Ron Benegbi is past president and principal of Carlton Group and Global Reward Solutions, headquartered in Toronto. He recently founded Ron Benegbi Consulting, based in Toronto. Benegbi assists clients with strategies for developing, delivering, and measuring their reward and recognition programs. Visit www.ronbenegbi.com or email him at email@example.com.