The question sometimes arises “do I have to pay tax if I win a prize or award from my employer?” Unfortunately, the answer usually makes Uncle Sam the winner as well. So before you take those big winnings with you on a cruise to the Bahamas, it’s good to know what some of the rules are.
Monetary prizes, awards, bonuses and gift certificates, including achievement awards, are generally considered taxable compensation and subject to the full array of employment taxes including federal and state withholding, unemployment tax, and FICA taxes. This includes wellness incentives (i.e. weight loss contests) that are becoming a popular offering by employers. Prizes, bonuses, awards that involve goods or services, such as a vacation trip for meeting a certain goal, also generally result in taxable income.
Now for the part that helps make taxes so complicated, all the exceptions to the rules. Probably the most widely used exception would be awards and gifts of minimal value. The IRS says that items such as a holiday turkey, generally fall under the IRS’s “de minimis” rule. If an employer provides an employee with a product or service that costs so little that it would be unreasonable for the employee to account for it, the value is not taxable income. You should note that cash awards and gift cards redeemable for cash are not included in this exception.
There are other exceptions out there such as awards for safety achievement, so check with your tax adviser. But if you lose some weight and win a prize, not only will your body thank you, so will Uncle Sam for getting a share of your winnings.
If you need assistance, contact your Henry+Horne tax professional for more details.