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.

Do Years of Service Programs Still Make a Difference?

Through research of mainly their own clients, O.C.Tanner, the largest company in the employee service awards field, concludes that service awards are a very valuable business tool and fulfill a critical role in culture and employee engagement of an organization.  This research might have been more useful had it compared years of service programs to how effective they are vs other types of employee recognition, but that's another subject. 

Years of Service are the most prevalent type of employee recognition program in corporate America.  They have become a “bronze shoe.”  It was the first type, has been around since our great-grandparents time, and is ubiquitous in the field of employee awards.  If you ask people it they believe in employee recognition programs they invariably answer in reference to a years of service program.  If you ask them if it is effective they will say that their employees seem to like it, but that’s about it.  What’s not to like? Every five years or so you get a plaque or can choose an award from a traditional catalog, the pricing of which is normally far above retail, but as you don’t pay for it or pay taxes on it you're happy with it.  It’s the “don’t look a gift horse in the mouth” rationale.  You're happy that is until you find out what your company paid for it.  Then it's only natural for some to compare it to the value of the item online, or suggest that maybe they were "worth more" than that a $250 TV for 10 years on the job.  Actually, not divulging the price of these items is a ploy that the award companies have used for years and a reason they tell you not to use gift cards. Does that make sense?  Do you really want to hide this price?  When the employee finds out your paid $400 for the item and they can find it online daily for $250, those can be very uncomfortable questions.

Frankly we’ve never been a fan of these traditional service award programs for several reasons.  First they don’t award based on merit, only time, they have little to choose from in the way of awards and the pricing if you took the time to compare is outrageous.

Taken by themselves, some would say that years of service programs are certainly better than no program at all. The average employee longevity is about 4.5 years.  This does fluctuate slightly year to year, but as almost 100% of years of service programs start issuing higher awards at 5 years, do these types of programs really make sense?  Giving an award to an employee for just being there might make sense to some, but wouldn’t giving an award to an employee for improved performance make more sense?

If you read the Tanner research they say that these programs help increase retention. There

OC Tanner HQ

evidence is that employees stay longer at companies that offer service award programs.  That’s quite a stretch in rationalization.  They say that respondents whose current job had a “career milestone program” projected staying 2.9 years longer than participants in companies without a milestone program.  The Bureau of Labor Statistics actual numbers on longevity would seem to refute the “projected” numbers as offered in the research. 

In our perspective, if all you had to spend on employees is $250 per year, you'd be much better off giving smaller awards on a more often basis than one large award once a year?  The consistent rewarding of performance will help to produce habits toward better performance ongoing.  Recognizing employee performance in the short term rather than rewarding longevity in the long term is a far better use of your budget dollars.  

For more information on Ultimate Choice Inc.’s products or services or other white papers please let us know. 

Should Gift Cards Be an Option in Years of Service Programs?

Believe it or not, the latest market research conducted by Incentive Magazine showed that close to 40% of all Years of Service programs use gift cards as some of their award options.

It wasn’t too long ago that you would never see gift cards in employee anniversary programs for several reasons.  First, the major recognition companies spent millions of dollars marketing their traditional awards such as company identified jewelry items, crystal, clocks, watches and the like.  Second they used very sophisticated training programs for their sales forces as well as for clients building a mystique that only deluxe trophy type merchandise would be proper to recognize an employee who remained at a company for a period of time usually in 5 year cycles  starting at 1, 3, or 5 years.  And lastly, they created excellent software platforms that made is very easy for a client to purchase a turnkey employee service award program.

So what changed?  How did gift cards start to become an option in these programs?  It certainly wasn’t because the companies that specialized in gift card systems spent millions in advertising, or marketing or a sales force that was trained to call on the clients. And it wasn’t because they built sophisticated electronic platforms to implement them.  It came about because clients were getting tired of paying very hefty premiums over retail price for these traditional trophy type items and hearing from employees that they were tired of being told an item as valued at $500, but they could see it every day online for a lot less.  Employees simply wanted more choice at a better value. 

With the age of the internet anyone could do a quick search to determine the value of an award, it didn’t take long for the employees to ask why the award that they understood cost $250 or $500 actually had a value of only $125 or $250.  That was the rule rather than the exception.

Gift cards are a part of Years of Service programs because it gives your employees what

they want without incremental cost to you.  If you are going to spend $250 or $500 on an award, wouldn’t it make sense to make sure that your employee receives as much of that budget as possible?  The traditional recognition companies will fight long and hard to keep you from putting gift cards in your program.  They know that once in, they will lose prized profit dollars year after year.  But do you really want to support their Taj Mahal corporate offices at the expense of your employees?

If you would be interested in how to use our gift card systems in your employees years of service programs please contact us at ultimatechoiceinfo@cox.net.