Employee achievement awards: when they are tax-free

The three conditions for the exclusion

Publication 15-A (2026) lists what an award must be to be excludable. It must be tangible personal property. It must be given to an employee for length of service or safety achievement. It must be awarded as part of a meaningful presentation. And it must be awarded under circumstances that do not indicate that the payment is disguised compensation. If those hold, you do not withhold federal income, social security or Medicare tax on the fair market value of the award, and excludable awards are not subject to FUTA tax either. A watch for 10 years of service handed over at a company ceremony fits. A gift card slipped into an envelope does not.

What never qualifies

The publication is explicit. The exclusion does not apply to awards of cash, cash equivalents, gift cards, gift coupons or gift certificates. There is one exception inside that rule: arrangements that grant only the right to select and receive tangible personal property from a limited assortment of items preselected or preapproved by the employer. The exclusion also does not apply to vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds and other securities, and similar items. Anything on those lists is wages, whatever it is called and however much it is appreciated. Our FICA tax calculator shows what the payroll taxes on an extra amount of wages come to.

The $400 and $1,600 limits

The most you can exclude for the cost of all employee achievement awards to the same employee for the year is $400. A higher limit of $1,600 applies to qualified plan awards. These are awards under a written plan that does not discriminate in favor of highly compensated employees. An award cannot be treated as a qualified plan award if the average cost per recipient of all awards under all of your qualified plans is more than $400. If during the year an employee receives awards not made under a qualified plan and also awards under a qualified plan, the exclusion for the total cost of all awards to that employee cannot be more than $1,600. The $400 and $1,600 limits cannot be added together to exclude more than $1,600.

Worked examples

An employee receives a $300 watch for safety achievement, not under a qualified plan. It is excludable in full ($300 is under $400). Now a $600 award, still outside a qualified plan: only $400 is excludable, and $200 is wages. Enter 600 and 0 in the calculator to see it.

Now a mixed year. An employee receives awards outside a qualified plan costing $500 and awards under a qualified plan costing $1,500. The ordinary awards are limited to $400 and the plan awards add $1,500, which would be $1,900, but the total cannot exceed $1,600. So $1,600 is excludable and $400 is taxable. Enter 500 and 1500 to reproduce it. The calculator applies the limits to the cost of the awards, as the publication states them.

The calculator assumes the plan awards meet the conditions, in particular the average cost per recipient condition for qualified plans. If that average exceeds $400, the plan awards are not qualified plan awards at all, and the lower limit applies.

Payroll consequences of an award that does not qualify

If an award is not excludable, either because it is cash or similar, because it is not for length of service or safety, or because it exceeds the limit, its value is wages. The publication’s general rule is that you withhold federal income, social security and Medicare tax on wages, and FUTA applies. Publication 15-B covers fringe benefits generally. For deposit timing, see the payroll deposit schedule page.

Practical guidance

Keep awards tangible and tied to years of service or safety milestones. Present them at a real event, not as a payroll add-on. Track the cost of all awards to each employee across the calendar year so the $400 and $1,600 limits are applied to the right total. If you want the higher limit, adopt a written, nondiscriminatory plan and check the average cost per recipient. And note this is an income and payroll tax rule: the publication does not address your own business deduction for awards, so ask a tax professional about that separately.

Sources

• IRS Publication 15-A, Employer’s Supplemental Tax Guide (2026): section 5, Wages and Other Compensation: Employee Achievement Awards. Read November 2, 2026.

Edition read: Publication 15-A (2026), for use in 2026. Rates, wage bases and dollar limits on this page are the 2026 figures printed in that edition; check the current publication and the IRS employment tax pages for your tax year. This page summarizes the publication and does not replace it.