In most sales jobs, employees expect incentives of some sort. And in non-sales jobs, recognizing workers' efforts and achievements with gifts and bonuses is an important part of keeping your workforce motivated. A legal, strategic incentive pay and awards program will allow your business to: Compete for talent by offering an attractive package. Motivate workers by creating the opportunity for them to earn more. Recognize your most valuable employees. Know what's taxable Certain types of gifts, given under the right circumstances (length-of-service awards, safety awards, etc.) are not subject to tax. Also, different rules apply to different types of bonuses, such as discretionary and non-discretionary. Employees' Pay page. Another good, concise resource is the American Institute of Professional Bookkeepers, which offers a free report titled "Bonuses, Gifts, Prizes and Awards: What's Taxable and What's Not", available only by calling 1-800-622-0121 or e-mailing firstname.lastname@example.org. Cover their taxes Some companies absorb the cost of employees' taxes on bonuses. And if you're giving a taxable non-cash award, such as a car, paying the tax definitely enhances the item's value. However, it's not as simple as paying the amount the employee would be taxed; there's a special calculation called a "gross-up," which determines the amount the employer must pay. Use merchandise incentives Non-cash rewards (excluding gift cards and certificates) valued up to $1,600 per employee per year are non-taxable, if they meet certain criteria for reason given. If your company is public, SOX affects your gifts and bonuses The Sarbanes-Oxley Act of 2002 requires public companies to document procedures and security controls of incentive programs. In short, this means tying every reward to a business outcome. You can give non-cash awards with a value of up to $1,600 per employee per year, as long as they are given in a way that doesn't favor your high earners and as long as they are given for accomplishments in years of service, productivity or safety. When giving gifts, take advantage of the fact that you're a small company, and therefore know your employees better than perhaps your big competitors do. Take the time to understand employees' likes and dislikes, so you can choose a gift they really want.