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Providing Tax Relief for Employee Gifts and Awards

Providing gifts or awards to employees can be a big motivator to those who have completed a special project or demonstrated exemplary performance where immediate recognition is appropriate.  While a gift or award can be an exciting moment, the event can quickly lose its luster when it’s left to the employee to both understand the tax implications and then cover the incremental tax burden associated with some types of recognition awards.

Recently, Peeriosity’s iPollingTM functionality was used to perform custom research in the Payroll research area to find out whether or not member companies gross up the value of gifts to pay required taxes on behalf of the employee, and, as a follow up question, whether or not a minimum threshold was used to make the determination.

The results show that a range of options are used, with 35% of companies indicating that they always gross up to cover incremental taxes, and with 29% indicating that they gross-up only when requested by the business unit to do so.  For 18% it varies by either geography or by business unit, and at 12% of member companies the gross-up happens only when an amount threshold is met.  Only 6% reported they never perform a gross-up of the award amount to cover the extra taxes the employee might incur.  Here are the details:

When considering if a minimum threshold is used, for 62% of companies, all gift values are typically grossed up, so no threshold applies.  For those companies that do apply a threshold, for 25% the threshold is less than USD $25, and for 13% the threshold is between $100 and $249. 

It’s interesting that so many companies always make an adjustment to cover added taxes for the value of the gift, which in many cases requires intervention to complete the calculation, when, for small dollar incentives, the tax consequences are nominal and likely to be of little to no significance compared to the overall tax liability for the employee.  After all, when employees complete their tax information to claim exemptions, they are using estimates for deductions that the employee may or may not have, with no visibility to the accuracy of the computations by the employer.  In other words, with so many estimates already part of the tax computation process, it isn’t likely anyone will be hit with a big unexpected tax bill based on the value of a gift or an award, so the burning question is, why bother?

Here are some of the comments from responding companies:

  • We typically gross up, however gifts are usually only for small amounts $50 – $100.
  • We recently implemented a threshold of $100 value or greater for grossing up these types of items.
  • This is something we are working on standardizing. We have some affiliates that do not gross up anything. Some gross up everything. Our plan is to move to a flat percentage gross up to assist the employees with the taxes but not do a full gross up.
  • In Australia, employees are not taxed on the value of gifts provided to them by their employer. In certain circumstances the employer will be liable for a tax on gifts provided to employees. Due to this, the value and frequency of gifts is generally adjusted to avoid this additional tax on the employer.
  • We do not gross up cash awards.

Does you company provide tax relief for employee gifts and awards?  If yes, when do you provide the relief, and are you using a minimum threshold for doing so?

Who are your peers and how are you collaborating with them?

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“iPollingTM” is available exclusively to Peeriosity member company employees, with consultants or vendors prohibited from participating or accessing content. Members have full visibility to all respondents and their comments. Using Peeriosity’s integrated e-mail system, Peer MailTM, members can easily communicate at any time with others who participate in iPolling.

Peeriosity members are invited to log into www.peeriosity.com to join the discussion and connect with Peers.   Membership is for practitioners only, with no consultants or vendors permitted.  To learn more about Peeriosity, click here.

 

 



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