Point-based reward programs are a popular choice for companies looking to engage and recognize employees. However, when it comes to taxes, things can get tricky. HR professionals and finance teams need to ensure they comply with IRS regulations to avoid unexpected tax liabilities.

That’s why we’re tackling the tax consequences of point-based employee reward programs. Specifically, we’ll break down:

• How point-based rewards are taxed
• When rewards are considered taxable income
• How platforms like Awardco help businesses maintain tax compliance

We encourage you to use this resource to ensure your team is on the right track so you can focus your time and energy on doing what you do best—cultivating a rewards program that’s meaningful and memorable to your workforce.

Disclaimer: This article provides general insights into managing employee rewards and their tax implications. Awardco is not a tax or legal advisory service, and this content should not be considered tax advice. We strongly recommend consulting with your finance team and a qualified tax professional to ensure compliance with regulations in your specific jurisdiction.

The potential risks of non-compliance

Points that are redeemed for high-value rewards and given out frequently are typically taxable as gross income (we’ll dive into the specifics shortly).

Failing to comply with IRS guidelines can lead to serious financial and legal risks for businesses. It might result in:

• Penalties and fines: Companies may face IRS penalties if they don’t properly account for employee rewards in payroll taxes.
• Employee impact: Employees may receive unexpected tax bills if rewards are not reported correctly.
• Audit risks: Misreporting taxable benefits can increase the likelihood of an IRS audit, leading to further compliance issues.
• Reputational damage: Consistent tax non-compliance can hurt a company’s reputation, affecting relationships with employees, investors, and regulatory bodies.
• Operational disruptions: If compliance issues arise, companies may need to dedicate additional resources to address IRS concerns, potentially diverting focus from key business operations.

Tax details for reward points

The IRS generally considers employee rewards taxable unless specifically excluded. This means points earned through reward programs are usually taxable. However, some exceptions apply, depending on how the points are redeemed.

When are points not taxable?

Points that are redeemed for non-cash awards may be excluded from tax. Excluded awards may include certain:

1. Employee achievement awards
2. Prizes or awards transferred to charities
3. De minimis (insignificant) awards and prizes

Certain requirements for each must be met to be excludable from tax. For example, the IRS states that an achievement award must meet all the following requirements to be excludable from tax:

• “It is given to an employee for length of service or safety achievement.
• It is awarded as part of a meaningful presentation.
• It is awarded under conditions and circumstances that don’t create a significant likelihood of disguised pay.”

This guide provides more information on additional requirements specific to Awardco’s employee achievement and length-of-service programs.

When are points taxable?

Achievement awards are generally excluded from taxable income as fringe benefits. However, if employees can redeem points for cash, gift cards, or valuable merchandise, the IRS typically treats these as taxable income (unless the merchandise comes from a limited assortment preselected by the employer).

Per the IRS: “The exclusion doesn’t apply to awards of cash, cash equivalents, gift cards, gift coupons, or gift certificates … The exclusion also doesn’t apply to vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items.”

De Minimis vs. Non-De Minimis benefits

• De minimis benefits: Low-value, infrequent perks like flowers for a birthday are generally not taxed. Meal money or local transportation fare for employees working overtime may also be exempt. The IRS has a list of de minimis benefit examples on page 9 of this guide.
• Non-de minimis benefits: Anything that falls outside of de minimis benefits standards is typically taxable. This often includes higher-value rewards like electronics, large bonuses, and travel perks. Cash and gift certificates/cards are always non-de minimis benefits, with the exceptions described above.

The tax impact of gift cards and vouchers

Let’s take a moment to apply the standards above in the context of gift cards, vouchers, and similar rewards.

Gift cards are one of the most commonly used rewards in point-based programs, but they come with clear tax rules:

• The IRS treats gift cards as cash equivalents, making them taxable income.
• Gift vouchers for specific merchandise may also be taxable if they hold significant value.

Remember, unlike low-value non-cash gifts, cash and gift cards are always taxable outside of very specific circumstances, regardless of the amount.

What types of non-cash rewards are taxable?

Beyond gift cards, many companies offer non-cash rewards, such as merchandise, travel, or exclusive experiences.

While these may not seem like traditional compensation, they can still have tax implications:

• Merchandise and electronics: If an employee redeems points for items like headphones, laptops, or high-end watches, these rewards are generally taxable, as they are considered non-de minimis benefits.
• Travel and experiences: If employees can exchange points for vacations or event tickets, these rewards may also be considered taxable fringe benefits.
• Charitable donations: Some programs allow employees to donate points to charity. While this may not be taxable for the employee, employers should verify deductibility rules with tax professionals.

Certain non-cash awards (such as occasional event tickets) may be exempt if they qualify as de minimis. Again, the IRS outlines rewards that would not be taxable or non-de minimis benefits in the Employer’s Tax Guide to Fringe Benefits.

Ensure your rewards are tax compliant

The Awardco platform was created with tax compliance in mind. We even collaborate with reputable tax partners to help your team stay on track.

Awardco simplifies the tax process with intuitive features like:

• Built-in tax compliance: Awardco’s platform helps businesses track and categorize taxable and tax-exempt rewards in real time.
• Integration with expert insights: Awardco provides expert tax insights to help businesses navigate reward program taxation effectively.
• Consultation: Employers can gain access to expert consultation services to enhance their employee experience and design programs that align with tax regulations.
• Transparent reporting: HR and finance teams can generate detailed reports to ensure proper tax withholding and IRS compliance.

Create a tax-compliant reward program with Awardco

Navigating the tax consequences of point-based employee reward programs can be complex, but you don’t have to do it alone. Awardco can offer guidance to HR and finance teams to help them manage rewards while staying tax-compliant.

Connect with Awardco today for tailored solutions and expert insights. Learn more here.