Are Employee Awards Taxable? Employer’s Guide to Recognition Program Rules

New customers often ask: Are employee awards taxable? If so, what are employer’s obligations when running an employee recognition program?

Let’s face it—everyone loves getting recognized at work. Whether it’s a thoughtful gift card, a cool gadget, or just a heartfelt “thank you,” employee awards can make a big difference in morale. But before you start handing out prizes like it’s a game show, it’s important to understand how these rewards are taxed. Different tax authorities have different rules, and the IRS in the U.S. and the CRA in Canada each have their own take on what’s considered a taxable benefit and what qualifies for a tax break.

Employee recognition programs are a fantastic way to boost engagement and show appreciation, but the tax treatment of those well-intended rewards varies depending on what’s given. Are gift cards always taxable? What about merchandise or cash bonuses? And can small perks like free coffee or event tickets fly under the radar? This guide breaks it all down in a way that’s easy to understand, helping employers stay compliant while making sure employees get the most out of their rewards.

‍

🇺🇸 United States: IRS Treatment of Employee Awards

In the U.S., the IRS generally treats most employee awards as taxable income—unless they fall under specific exemptions.

1. Gift Cards and Cash Equivalents

Gift cards and cash-like rewards (such as prepaid debit cards) are always taxable, no matter the occasion. The IRS sees them as cash compensation, so their value gets added to the employee’s gross wages and is subject to taxes, just like a paycheck.

2. Tangible Personal Property Awards

Some non-cash awards can qualify for tax breaks if they meet the IRS’s "employee achievement awards" criteria. To be eligible, the award must:

• Recognize length of service or a safety achievement.
• Be given in a meaningful way (not just slipped into a paycheck).
• Not be a disguised form of compensation.
• Be part of a written qualified plan (for higher tax-exempt thresholds).

The tax-free limit is $1,600 per employee per year under a qualified plan and $400 per employee per year under a nonqualified plan. Anything above that is taxable.

3. De Minimis Benefits

Small, occasional perks—like holiday turkeys, flowers, or the occasional event ticket—may be tax-free as de minimis benefits. But don’t get too generous: Gift cards, no matter how small, don’t qualify and must be taxed.

4. Reporting and Withholding

Any taxable awards must be reported on an employee’s W-2 form, and employers must withhold applicable taxes.

‍

🇨🇦 Canada: CRA Treatment of Employee Awards

The Canada Revenue Agency (CRA) also considers most employee awards to be taxable benefits, but with a few exceptions.

1. Gift Cards and Cash Equivalents

Gift cards and cash bonuses are generally taxable, but there’s a silver lining: brand-specific gift cards that can only be used at a single retailer (or affiliated stores) may be considered non-cash gifts and could be tax-free—if they meet the CRA’s criteria.

2. Non-Cash Awards (Tangible Personal Property)

Under CRA rules, non-cash gifts and awards may be tax-free if:

• They are for work anniversaries, outstanding service, or similar achievements.
• The total value of all non-cash gifts in a year doesn’t exceed $500 CAD (including taxes). Any excess amount is taxable.
• They are not performance-based awards, which are always taxable.

3. De Minimis Gifts

The CRA allows for small non-cash gifts—such as coffee mugs, plaques, or flowers—to be tax-free if their value is considered trivial.

4. Long-Service Awards

Employees can receive a non-cash long-service award tax-free once every five years, as long as its value is $500 CAD or less and meets the non-cash gift criteria. Anything over that is taxable.

5. Reporting and Withholding

Any taxable awards must be reported on the employee’s T4 slip, and employers must withhold the appropriate taxes.

‍

Key Differences Between the U.S. and Canada

Gift Cards

United States (IRS): Always taxable

Canada (CRA): Tax-free if retailer-specific and meets CRA conditions

‍

Cash Awards

United States (IRS): Always taxable

Canada (CRA): Always taxable

‍

Tangible Awards

United States (IRS): Tax-exempt if under $1,600 (qualified plan) or $400 (nonqualified)

Canada (CRA): Tax-free if under $500 CAD (non-cash)

‍

De Minimis Gifts

United States (IRS): Small non-cash gifts are tax-free

Canada (CRA): Trivial gifts are tax-free

‍

Long-Service Awards

United States (IRS): Tax-exempt under specific conditions

Canada (CRA): Tax-free every 5 years if ≤ $500 CAD

‍

How Qarrot Can Help with Tax Reporting

As an employee recognition platform, Qarrot provides employers with a ready ability to pull reports and get the data needed for employee tax reporting. For example, employers can view and download employee redemption data, which includes the value of all rewards received by employees during your company’s fiscal year. This data is available in .csv and .xls format so that it can be readily handed over to your finance, accounting, and payroll functions for the required reporting.

‍

Conclusion

Nobody likes unexpected taxes, especially when they thought they were just getting a nice reward. Both the IRS and CRA have strict rules on what counts as a taxable benefit, particularly when it comes to gift cards and cash-like awards. So, don’t be caught off-guard. As an employee, you should carefully review how tax rules may apply to your employee recognition program to maximize benefits while staying tax-compliant. When in doubt, we always advise our customers to check with a tax professional before launching their program with employees. And using an employee recognition platform like Qarrot can simplify tax reporting with downloadable data about your employees’ redemptions.

‍