The word taxable, no matter what it’s associated with, often triggers immediate resistance.
And sometimes for good reason — for businesses, “taxable” can mean extra work for accounting teams. For employees, meanwhile, it can often feel like they’re being nickel-and-dimed by taxes on every little thing.
But even though employee recognition awards are often taxable, it doesn’t mean you should write your program off before it's even begun. With the right system and a little work on communication, it’s possible to make it easy on your finance team while ensuring your employees have the information they need to understand both the benefits of rewards and the tax implications. Let’s take a closer look at taxes on rewards and awards, and what they mean for you, your company, and your people.
Note: While we’ve done our best here to be as comprehensive as possible, please be sure to consult your own finance professionals as legislation may be different in your tax jurisdiction. This post is intended to offer guidance and information only, and is not legal or financial advice.
“Why are rewards considered a taxable benefit?”
Most benefits and perks you provide to employees are taxable, including parking, gas, cell phone benefits, gym memberships, equipment, or work-from-home stipends. Any cash or near-cash bonuses are also considered a taxable benefit, and recognition rewards like gift cards are no exception.
According to the Canada Revenue Agency, cash and near-cash awards are always a taxable benefit for the employee. A near-cash award includes gift cards that function the same as cash, based on their ability to be used to purchase goods or services, including:
- A gift for a special occasion, such as a holiday or birthday gift.
- A reward for an employee-related accomplishment, such as outstanding service for a period of time with your organization, or exceeding expectations on a project.
“My employees don’t want to be taxed on recognition!”
That may be true, but have you actually asked them? Try sending out a quick survey and ask for input during an all-hands meeting, or ask your managers to connect with their teams about it.
While nobody likes paying taxes, remember that employees will almost always appreciate a gift attached to a specific event or accomplishment, even if it is taxable. And a taxable gift card that the employee can spend as they wish is always preferable to a gift they may not really want but that still triggers a tax deduction. At the end of the day, it’s better to be rewarded and taxed on the reward than to not receive any recognition at all.
If your team really doesn’t want to deal with taxable rewards, then consider setting up a non-monetary peer-to-peer recognition program. This way, you’ll at least be able to implement a program that gives your team an avenue to show their appreciation to each other.
But remember that there are pros and cons to both taxable and non-taxable rewards. Imposing taxable rewards on a team resistant to the idea is a sure recipe for non-adoption, while non-monetary rewards (or gifts you’ve picked out for employees) may hold little appeal for a team who appreciates the flexibility of gift cards and isn’t overly fussed about the tax. Either way, your recognition program should fit what your employees want and value.
“What about a points program? You can’t tax points!”
True, employees won't be taxed on the actual points as they accumulate. But as soon as an employee redeems their points for a gift or reward from a catalogue, it becomes a taxable benefit.
That means that the tax consequences of point-based employee rewards programs can become very complicated, making it difficult to both track rewards and taxes and to convey the information to your employees.
The value of a gift card is simpler and more straightforward, both from an accounting standpoint and for your employees to understand. For example, for a $50 gift card, you’re subject to, say, 20% tax on the value, so your net award is $40. With points, the lack of transparency around the actual reward value, and the amount of tax it’s subject to, can leave employees feeling confused and misled.
“Taxable awards are a pain for our accounting department.”
Taxable awards have historically been an accounting team’s worst nightmare because it can be extremely difficult to keep track of who is getting awarded, what they’re being awarded for, and how much the award is worth.
This is often the case when gifts are given to employees by managers on an ad-hoc basis, sometimes referred to as a ‘manager’s hidden spend’. Without a formalized system to document or track these expenses, this situation can turn rewards into liabilities, as your company could be vulnerable to an audit. You can make both your managers’ and your accounting department’s lives easier by centralizing your recognition program within a single system that provides transparent reporting.
“What is the benefit in providing taxable employee incentives?”
Financial transparency relating to all forms of cash and near-cash awards and gifts is in your company’s and your employees’ best interest. Rolling recognition awards into payroll reporting makes the process simple and straightforward for everyone, making them part of your overall taxable benefits program — which also means they’re pensionable and insurable in Canada.
Taxes should never be an excuse to withhold praise and recognition from your team. The fact that awards are taxable adds a layer of complexity, but with the right tools that complexity is easily managed. And the benefits of offering recognition — on your team’s morale and on your company’s culture — far outweigh the effort involved in administering and reporting the taxes.
Whether you choose to offer cash-based rewards, gifts, or a points program, ensuring your people are being rewarded for their contributions means there will likely be tax implications for both your company and your employees. But if taxable awards are not a fit for your team, a great place to start is with simple thanks, and peer-to-peer recognition is a great non-monetary way to begin building a culture of recognition.
“What is grossing up? Is that a good way to make taxable employee incentives more appealing to my team?”
When employees receive a taxable incentive, some companies will choose to “gross up” the benefit. Grossing-up is the practice of topping up the amount an employee receives in their paycheck to cover the extra tax they’ll be deducted.
For example, let’s say you have an employee at a 30% tax rate who receives a $100 gift card. Without being grossed up, they’ll receive the full amount of the gift card and then have $30 of tax deducted from their paycheck.
If you were to gross up the benefit, you would give the employee a $136 gift card with an explanation that $36 of it is to offset the tax deduction. While many employees appreciate this gesture, some may find it a bit confusing. The decision to gross up your employee benefits is an individual business decision and there’s really no right or wrong answer.
Managing taxable employee recognition awards with Guusto
While managing taxable employee incentives isn’t always easy, our recognition platform does a lot of the heavy lifting for your organization. Our simple reports allow you to download taxable benefits reports for each employee, which can be easily imported into most accounting software. To learn more, download this free guide, Taxable Benefits Made Easy:
Make your case for recognition with our Executive Pitch Kit
Resistance to taxable employee incentives can be just one of the roadblocks you face when trying to make the case for a recognition program to your leadership.
If you need help getting buy-in from the C-suite, our Employee Recognition Executive Pitch Kit might be for you. This resource includes:
- Pitching Recognition to the C-Suite, a guide featuring tips from HR experts on how get your program approved
- A fillable PowerPoint template for your executive presentation
- A one-page proposal template
- Our ROI Calculator to help you quantify the potential payoff of your program
Fill out the form below to get instant access to all 4 of these assets for free!
***Editor's note: This blog was originally published in March 2021, but has been updated with additional information and clarifications.