Know what's taxableCertain 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 taxesSome 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 incentivesNon-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 bonusesThe 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.