Employee Recognition

Taxable vs Non-Taxable Rewards: Understanding Which is Right for You

The word taxable, no matter what it’s associated with, often triggers immediate resistance. And sometimes for good reason — for business, “taxable” can mean extra work for accounting teams, and for employees, it can often feel like they’re being nickel-and-dimed by taxes on every little thing.

But even though recognition rewards are often taxable, it’s possible to make them 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. 

 

Please be sure to consult your own finance professionals, as legislation may be different in your tax jurisdiction. 

 

“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 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 rewards!”

That may be true, but have you actually asked them? Try sending out a quick survey (you can use our template) and ask for input during an all-hands meeting, or ask your managers to connect with their teams about it. If your team doesn’t want to deal with taxable rewards then consider setting up a peer-to-peer recognition program that is non-monetary. 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 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. 

 

While nobody likes paying taxes, remember that employees almost always appreciate a gift that is relevant to them, 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. 

 

“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. A points system can also quickly become overly complicated, making it difficult to both track rewards and taxes, and to convey the value to your employees. The value of a gift card is simple and straightforward, both from an accounting standpoint and for your employees to understand — here is 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 gifts?”

Financial transparency into 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. 

Make taxable benefits a breeze

Guusto is an employee recognition platform that does the heavy lifting for your organization’s taxes. Our robust and simple reports allow you to download taxable benefits for each employee. Your accounting department will appreciate having real-time data at their fingertips, both for tax reporting and to demonstrate the effectiveness of your employee recognition program. We make recognition and rewards programs simple, with the ability to bulk-send gifts and send non-monetary recognition to peers. Speak with our account representatives to see how it works. 

 

Noah Warder

Written by Noah Warder

Noah is the Head of People at Guusto and loves sharing his insights, experience and knowledge when it comes to HR and People practices. He is always up for a conversation on how best to support employees to make safe and inclusive work cultures.

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