Prizes, Awards, and Bonuses

March 26, 2012

Prizes and Awards

The fair market value of prizes and awards must be included as income for federal income tax purposes. Even if the prize or award was given in recognition of accomplishments in a civic, educational, literary, scientific, artistic, charitable, or religious field, the fair value of the prize is generally considered taxable except in a situation where all of the following requirements are met:

  • You took no action to enter the contest.
  • You are not required to perform services in order to receive the prize.
  • You arranged for a transfer of the prize from the payer directly to a governmental unit or tax-exempt charitable organization, and you did not use the prize or award before it was transferred. If the prize or award was the result of an unexpected presentation, you must return the prize or award before using it in any manner.

Bonuses

Generally, the fair market value of awards or bonuses given to an employee by his employer in recognition of good work must be included in taxable income as a part of wages.

If the achievement award is a non-cash award in the form of tangible personal property in recognition of length of service or safety accomplishments, the fair market value of the award may be excluded from income. The excludable amount cannot exceed the lower of the employer's cost for the award or an amount set by the tax law, and the granting of the award had to be part of a meaningful presentation.

However, if the award is for a length of service that is less than five years or the employee has received another length of service award during the year or during the prior four years, the fair market value of the award is considered taxable income. A safety achievement award is taxable if the recipient is a professional employee such as a manager, administrator, or clerical employee or if more than 10 percent of the eligible employees received the same type of award during the year.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.

 

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