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Incentive Pay, Prizes, and Awards Are Taxable Income

Both employers and employees often make the mistake of not accurately reporting income by excluding incentives and prizes/awards from the employee's reported income. That error can result in underpaying your taxes, and subsequently owing tax penalties and interest. Avoid these issues by making sure that all of your income is reported on your tax return.

Here are a few rules of thumb to help you know which employee rewards are considered taxable fringes:

  • Incentives: Rewards, including non-cash rewards such as trips or merchandise, given for performance or outstanding achievement are taxable income. Your employer should include the FMV (fair market value) of all non-cash rewards in your wages as reported on your W-2, and all normal withholdings should apply to that compensation (income tax, social security tax, and Medicare tax).
  • Length of Service Awards: Non-cash awards earned for longevity with your employer typically do not qualify as taxable fringe income.
  • Safety Awards: Like length of service awards, non-cash rewards for safe driving or other safety records typically do not qualify as taxable income.
  • Non-cash de minimis fringes: This is a fancy term for non-cash items like birthday or holiday presents or gifts of theater or sports tickets. These types of low-value gifts are not considered taxable fringes.

Not sure whether your W-2 includes all of your taxable compensation this year? Still confused by what is and is not considered taxable fringe income? Just ask! Taxation Solutions, Inc. is here to help Charlotte-area taxpayers (personal and business) get your taxes done right. We'll help you sort through the complexities of taxable fringe income to make sure everything is reported accurately. Contact us right away to get started!