Taxability of service rewards

Q: What tax rules apply to awards given to employees for service?

"The IRS says that bonuses or awards given for outstanding work are to be included in employees' income and should be shown on their Form W-2s," says Tom McFerson, CPA, an accredited business valuator and a partner with Gatto McFerson in Santa Monica, Calif. "So, whether you award cash, goods, or services, you should include them in an employee's gross wages."

However, McFerson says, "If you give tangible personal property—other than cash, a gift certificate, or an equivalent item—as an award for length of service or safety achievement, you generally don't need to claim it as income. So a $500 watch given on an employee's 10th anniversary of employment wouldn't be considered taxable." Still, McFerson says, there are varying dollar limitations. Check with your accountant to make sure you aren't exceeding these.

Tom McFerson