When a company awards a top performer with a trip
to Las Vegas or a new flat-screen TV, taxes might not be top of
mind. But anyone who plans incentive programs must be sure that
they review tax considerations related to the 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 therefore do not 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."