U.S. · Employer fringe benefits
Employee achievement awards explained.
The $1,600 and $400 award limits, what counts as tangible personal property, and when value becomes wages.
An achievement award is excluded from an employee’s wages only if it is tangible personal property given for length of service or safety achievement, in a meaningful presentation, without a significant likelihood of disguised pay. For 2026 the excludable annual amount is $1,600 for qualified plan awards and $400 for awards that are not. Cash, gift cards and gift certificates never qualify.
Compare Pub 15-B fringe benefits
Result
What qualifies
Publication 15-B (2026) limits this exclusion to the value of tangible personal property you give to an employee as an award for either length of service or safety achievement. Three requirements must all be met: the award is given for length of service or safety achievement; it is awarded as part of a meaningful presentation; and it is awarded under conditions and circumstances that do not create a significant likelihood of disguised pay.
The exclusion does not apply to awards of cash, cash equivalents, gift cards, gift coupons or gift certificates. The one exception the publication carves out is an arrangement granting only the right to select and receive tangible personal property from a limited assortment of items you preselected or preapproved. It also does not apply to vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items.
The $1,600 and $400 figures
The publication says you can generally exclude the value of achievement awards from the employee’s wages if their cost is not more than the amount you can deduct as a business expense for the year. The excludable annual amount is $1,600, or $400 for awards that are not “qualified plan awards.” Your deduction for the cost of achievement awards given to any one employee during the tax year is limited the same way: $400 for awards that are not qualified plan awards, and $1,600 for all awards, whether or not they are qualified plan awards.
A qualified plan award is an achievement award given as part of an established written plan or program that does not favor highly compensated employees as to eligibility or benefits. A written, evenly offered program is therefore what moves the ceiling from $400 to $1,600.
Highly compensated employee test for 2026
A highly compensated employee for this purpose meets either of two tests: the employee was a 5% owner at any time during the year or the preceding year, or the employee received more than $160,000 in pay for the preceding year. You can choose to ignore the pay test if the employee was not also in the top 20% of employees ranked by pay for the preceding year. The publication’s caution adds that to decide for 2026 whether an award is a qualified plan award under the deduction rules, you treat any employee who received more than $160,000 in pay for 2025 as highly compensated.
An award also fails to be a qualified plan award if the average cost of all the employee achievement awards given during the tax year, which would be qualified plan awards except for this limit, is more than $400. In figuring that average, you ignore awards of nominal value.
When the award costs more than your deduction
You deduct achievement awards, up to the maximum amounts above, as a nonwage business expense on your return or business schedule. If the cost of awards given to an employee is more than your allowable deduction, the publication tells you to include in the employee’s wages the larger of two amounts: the part of the cost that is more than your allowable deduction (up to the value of the awards), or the amount by which the value of the awards exceeds your allowable deduction. You then exclude the remaining value of the awards from the employee’s wages.
Worked illustration
This illustration applies the publication’s rule and is not an IRS example. A company with a written service-award program that is offered to all employees gives one employee a watch worth $1,900 at a 10-year presentation. The program is a qualified plan, so the ceiling is $1,600. The cost exceeds the allowable deduction by $300. Applying the publication’s “larger of” rule with a cost and value of $1,900, the amount over the deduction is $300 on both measures, so $300 goes into wages (boxes 1, 3 and 5 of Form W-2, with withholding and employment taxes) and the remaining $1,600 stays excluded.
If the same company had no written plan, the ceiling would be $400, and the same watch would produce $1,500 of wages. If the company instead gave a $200 gift card for 10 years of service, the card is a cash equivalent and the whole $200 is wages, regardless of the dollar ceiling.
Who counts as an employee
For this exclusion the publication treats as employees a current employee; a former common-law employee for whom you maintain coverage in consideration of or based on an agreement relating to prior service; and a leased employee who has provided services on a substantially full-time basis for at least a year under your primary direction or control. A 2% shareholder of an S corporation is not treated as an employee for this purpose and is handled like a partner for fringe benefit purposes. A 2% shareholder is someone who directly or indirectly owns, on any day of the tax year, more than 2% of the stock or of the voting power.
Employment taxes and reporting
Table 2-1 shows achievement awards as exempt from federal income tax withholding up to $1,600 for qualified plan awards ($400 for nonqualified awards), with a note that the exemption does not apply to certain highly compensated employees under a program that favors them. The publication shows social security, Medicare and FUTA treatment as exempt as well for awards within the exclusion. Any taxable portion follows the general fringe benefit reporting rules: determine the value by January 31 of the following year and include it in boxes 1, 3 and 5 of Form W-2.
Two neighbouring rules are easy to confuse with this one. A holiday gift that is not cash can be a de minimis benefit, and a gift card is never de minimis. Awards for other reasons, such as sales performance, are not covered by this exclusion at all.
Pub 15-B fringe benefits at a glance
| Benefit | 2026 limit or test, per Pub 15-B | Reporting, per Pub 15-B |
|---|---|---|
| De Minimis Benefits | No general dollar cap. Test is value and frequency. Specific figures: $21 a month for discounted transit passes; $2,000 face amount of spouse or dependent group-term life; 85% business use for a copier. | Excluded benefits are not included in wages. Cash and cash equivalents are always taxable and go in boxes 1, 3 and 5 of Form W-2. |
| Achievement Awards | $1,600 a year for qualified plan awards ($400 for awards that are not qualified plan awards). Tangible personal property for length of service or safety only. | Value above the allowable deduction is included in wages (boxes 1, 3, 5). Excluded value is not reported. |
| Educational Assistance ($5,250) | $5,250 a year per employee under a written educational assistance program. Includes qualified student loan payments made after March 27, 2020. | Amounts over $5,250 are included in wages (boxes 1, 3, 5) unless they are working condition benefits. |
| Dependent Care Assistance | $7,500 a year ($3,750 if married filing separately), not more than the smaller of the employee’s or spouse’s earned income. | Report all dependent care assistance in Form W-2 box 10, including the part over $7,500; the excess is also in boxes 1, 3 and 5. |
| Adoption Assistance | $17,670 exclusion for 2026. Excluded from income tax withholding, but taxable for social security, Medicare and FUTA. | Report all qualifying adoption expenses paid or reimbursed, including amounts over the exclusion, in Form W-2 box 12 with code T. |
| Meals on Business Premises | No dollar limit. Test: furnished on business premises and for the employer’s convenience. 2% S corporation shareholders are not treated as employees. | Excluded meals are not reported. Meals that fail the test are included in wages (boxes 1, 3, 5). |
| No-Additional-Cost Services | No dollar limit. Test: excess-capacity service in the employee’s own line of business with no substantial additional cost (lost revenue counts). | Excluded services are not reported. Highly compensated employees lose the exclusion if the service is not offered on the same terms to all or a nondiscriminatory group. |
| Cents-per-Mile Valuation Rule | Personal miles x the IRS standard mileage rate. Allowed if regularly used in business (50% safe harbor) or driven 10,000+ miles a year primarily by employees. Not allowed above the maximum automobile value. | Include the value in wages (boxes 1, 3, 5) or have the employee reimburse it. |
| Cafeteria Plan | Health FSA salary reduction limit of $3,400 for plan years beginning in 2026. No dollar limit on the plan itself; each benefit has its own exclusion. | Benefits that are not qualified, or that favor highly compensated or key employees, are included in wages (boxes 1, 3, 5). Qualified benefits keep their own reporting rules. |
| Working Condition Fringe | No dollar limit. Excluded to the extent the employee could have deducted the cost as a business or depreciation expense, with substantiation. | Excluded value is not reported. Independent contractors and directors have extra exceptions (product testing, parking). |
| Lodging on Business Premises | No dollar limit. All three tests: on business premises, for employer convenience, condition of employment. 2% S corporation shareholders are not treated as employees. | Excluded lodging is not reported. Lodging that fails any test is included in wages (boxes 1, 3, 5). |
Other pages in this set
De Minimis Benefits, Educational Assistance ($5,250), Dependent Care Assistance, Adoption Assistance, Meals on Business Premises, No-Additional-Cost Services, Cents-per-Mile Valuation Rule, Cafeteria Plan, Working Condition Fringe, Lodging on Business Premises.
Sources
- IRS Publication 15-B (2026), Employer’s Tax Guide to Fringe Benefits: section 2, Achievement Awards; Table 2-1; section 4 reporting. Page last reviewed April 30, 2026. Read November 2, 2026.
Every dollar figure on this page is a 2026 figure from the publication unless a different year is stated. The IRS can change a publication at any time, and the publication, your plan documents and a payroll professional control over this page. This page restates the publication and does not extend it to facts it does not address.
Frequently asked questions
What is the 2026 limit on employee achievement awards?
Publication 15-B (2026) says the excludable annual amount is $1,600, or $400 for awards that are not qualified plan awards.
Can I give a gift card as an achievement award?
No. The exclusion does not apply to cash, cash equivalents, gift cards, gift coupons or gift certificates, except an arrangement granting only the right to select tangible personal property from a limited assortment you preselected or preapproved.
What awards qualify?
Tangible personal property given for length of service or safety achievement, as part of a meaningful presentation, under conditions that do not create a significant likelihood of disguised pay.
What is a qualified plan award?
An award given as part of an established written plan or program that does not favor highly compensated employees as to eligibility or benefits.
What if the award costs more than my deduction?
Include in wages the larger of the cost above your allowable deduction (up to the value of the awards) or the amount by which the value exceeds the deduction, and exclude the rest.
Not tax or legal advice
This page summarizes IRS Publication 15-B and is not tax, legal or financial advice. Whether a benefit is excluded depends on your plan terms and facts. A CPA, enrolled agent, payroll provider or tax attorney can confirm what applies to you. Everything runs in your browser; nothing you enter is sent anywhere.