Is Making a Years of Service Award Tax Deductible a License to Steal?

In 2017 the top 1 percent of taxpayers paid a 27.1 percent individual Federal income tax rate, which is more than six times higher than taxpayers in the bottom 50 percent (3.6 percent).  Many on the bottom 50% paid no income tax.

The vast majority of the rank and file employees in business today are, on average, in the bottom 50%. If they pay any Federal income taxes at all in all likelihood it will be less than 10%,  probably closer to the 3.6%.  

Without getting into the weeds on the rules for taxation of employee awards, $400 of awards you give to your employees for years of service is not taxable, but only if it's merchandise, or tangible personal property.  Gift cards are taxable just like you are giving them cash.

Not a week goes by that I don't discuss using gift cards for years of service programs, and not a week goes by that I don't have a client say they can't because the merchandise is not taxable, but gift cards are.  And that's true, and it's also true that you will spend $400 for the merchandise award (and more if shipping and taxes are not included) as well as $400 for the gift card net.  So your budget is the same.  And frankly there are many clients who don't want to rock the boats of their tax department to try to use gift cards, even if they are a much better value for their employees.

This simplistic comparison certainly assumes that the merchandise you pay $400 for has the same value as the $400 you spend on the gift card.  They're both $400...Right?  But this comparison without a doubt also assumes they are the same real value to the employee.  That is certainly and completely not true!

For decades, years of service award companies have been using the ploy of “their awards are not taxable” to load their selections with such high priced merchandise that actual comparisons show are almost always priced higher than retail…sometimes as much as double retail.  For those suppliers the "it's not taxable ploy" is a license to steal.  Is using taxation as the reason to not give your employees the best value the right thing for them?  Shouldn't this be what it's all about, recognizing them for their performance over the years with something meaningful?  Is giving them a $400 item that they see online for $250 meaningful to them?

Don't Kid Yourself...Your Employees Know the Truth

In the age of online shopping where comparing merchandise is a way of life, determining the value of these awards is easy.  We all shop that way every day, and we're always looking for the best value. When the employee learns that you paid $400 for the item, rest assured  they will go online to find out what it's really worth. That’s the main reason many employees ask for gift cards in the first place.  

So How to Use Gift Cards

We have many clients who use gift cards for years of service programs.  They are much simpler to use, all of our gift card systems are suitable for these programs.  Some clients decide to pay for the taxes themselves, but many others just add the amount of the gift cards they give to the employees W-2 at the end of the year, and the employee is subject to the tax on that $400.  But as mentioned about, many aren't even paying Federal Income Tax and if they are it is usually less than 10% and more likely below 4%.  Using our $400 as an example, it the merchandise item shows a real value through comparison of only $250 online, what do you think the employee would prefer?  Getting a $400 gift card, paying the $12-$40 in taxes, purchasing the $250 item online and the having $100+remaining would be our bet.

That would seem to be a easy decision to us.

And by the way, in the last research completed by the incentive industry, shows the usage of gift cards in years of service programs is approaching 50%.  Now we know why!

Finally most clients don't have the time to do the comparisons necessary to make an informed decision on using gift cards.  But we do, we have done many of them, and will gladly do one for you if you'd like.  Just let us know.  It won't cost your budget any more, but it will guarantee that the majority of that budget gets into the hands of your employees, not those high priced merchandise suppliers.

Motivating Diverse Employee Groups

Incentive Magazine recently asked experts from various award companies for their tips on motivating diverse groups of participants.  These companies plan incentive programs for employees with a wide range of backgrounds, interests, roles and, of course, award preferences. While there are obvious differences in employee backgrounds, communication strategies and award delivery preferences, motivating this diversity is more common across these lines than you might think.

The following list of tips that offers good insight into the things you need to keep in mind when planning your award programs.  Some are more along the common sense side, but others may give you some good food for thought. 

Understand Your Audience

Survey your employees to find out what is meaningful to them. You will already know much of what they say, but could also come up with some good ideas to put in the program.

You can take surveys to the extremes with audience persona development, segmentation and generational components, etc., but that type of employee research would not really be necessary for most programs.

Effectively Launch the Program

Most companies don’t put as much emphasis on this phase of the reward program as they should. They assume that just the mention of the programs and “what’s in it for me is sufficient to gain excitement at the beginning.  But better launch preparation will provide dividends and actually allow you to spend less on the ongoing communications phase throughout. The importance that your participants put on your program will be in direct proportion the effort and importance you give the launch.

Clear and Consistent Communications

Communications doesn’t have to be expensive to be effective.  But you do need to take it out of your normal communications efforts and do it as often as appropriate for your organization. Communications about what employees can earn in rewards will be read and retained. If unsure how much and how often to communicate, err on the side of more and more frequently. In addition make sure your messaging is custom and speaks directly to the individual such as program standings, percentage towards qualification, and status updates etc.

Don’t Just Use Digital Communications

It’s natural to use digital as your first option, but old-fashioned printed pieces, posters etc are still very effective and enjoyed by most.  They are also often retained and shared with the family.

Have a User-Friendly IT Platform

The award industry is loaded with the “best mouse traps” incentive software.  Our advice has always been “Don’t go hunting squirrels with a bear rifle.”  We estimate that UP TO 90% of the features in current software are either not or underutilized. It also needs to be easy to use.

Recognize and Reward Teams

The incentive industry has known for years that you can get tremendous success by incorporating team awards in your program. Take advantage of it wherever possible, but use it in combination with individual awards.

If Using Travel, Tailor it to Your Employees 

If you using travel as the prominent award make sure you plan it with the participant in mind. Sun and fun can be highly motivation to the younger set, but not so much for older generations who may enjoy sightseeing and new experiences. And, don’t let your C-suite determine your destination based on where the executive wants to go. 

Don't Forget Gift Cards
When it comes to an award that appeals to everyone, gift cards offer the largest choice of any award in the industry. They have become by far the leading option for non-travel awards.

Make Sure It's Measurable 

This tip should actually be number one and not the last.  Without measurement you won’t have much motivation. Not having measurement is like bowling with a curtain in front the pins.  Make sure your objectives are measurable and communicate individual and team performance at the beginning, often in the middle and the end.

For more information on Ultimate Choice Inc.’s products or services or other white papers please contact us at Ultimatechoiceinfo@cox.net

Great Ways to Improve Your Employee Recognition

We are often asked by clients for different ways to improve employee recognition, or to kick it up a notch.

While many of the following ideas may seem obvious to some, you might be surprised how rarely we find them in use. 

Write Out in a Formal Letter

Write the letter on company letterhead; tell the employee what they did, how their actions impacted the company and other employees. Send it to the employee, give a copy to the department head and CEO, place a copy in the file.  If suitable, publish it in a company form of communication. 

Write a Personal Note

Write it out long hand on some nice personal note paper, (print legibly if handwriting not suitable) do not send an email. You might also want to have a manager co-sign it. Photocopy the note and place the recognition in the employee’s file.

Accompany the verbal recognition with Recognition Item

Engraved plaques, merchandise that carries the company logo, even certificates of appreciation reinforce recognition.

Everyone Likes Gift Cards

Accompany the letter or note with a token or diminimous gift card.  They are enjoyed by everyone, and can be shared with the family.

Present the Recognition Publicly.

Even if the employee is uncomfortable with publicity, it is important for the other employees to know that employees are receiving recognition.

Encourage Peer to Peer Recognition

Set up a simple system to allow and encourage employees to recognize employees in their department and in cross functional departments. Consider implementing a budget allowing each employee an amount they can give annually.  Using gift cards is the easiest way to make this work.

A Simple “Thank You” Counts

A simple “thank you” counts as employee recognition. It’s quick, easy to do, and can go a long way, and helps to create a positive environment.  You cannot use recognition up. You cannot run out of recognition.

No budget is too small to afford employee recognition. If you want increased employee satisfaction and engagement, bring on lots of employee recognition. You'll be happy that you did.

For more information on Ultimate Choice Inc.’s products or services or other white papers please contact us at Ultimatechoiceinfo@cox.net