DEFINITION of Cash Awards
Cash is king, especially when it comes to giving props to employees for meeting or exceeding goals for a special project, on an anniversary date or even the holidays. Cash awards are awards given to employees in the form of money or another asset, such as stock, that can be turned in for cash.
BREAKING DOWN Cash Awards
Cash awards can come in many forms: a one-time bonus, profit sharing, stock options or gift cards, to name a few. Anything that can be exchanged for hard, cold cash falls into this category. Considering that MSN Money reports that nearly half of all Americans spend more than they earn in a year, any extra is helpful whether it’s used to pay bills or contribute to a much-needed vacation.
While a pat on the back or acknowledgment of a job well done in a company newsletter is a nice gesture, the impact falls far short of cash bonuses. It doesn’t cost a company anything to verbally express its thanks, so handing over actual cash is perceived as far more concrete measures of appreciation, loyalty and stability.
This practice is often a win-win situation. The employee’s self-esteem, confidence and wallet size grow while employers are often rewarded by the ability to retain hard-working, knowledgeable and experienced personnel.
Cash Awards and Taxes
Whether you’re the recipient of a cash award or the provider of one, it’s important to know the tax ramifications.
For employees, bonuses are subject to income and FICA taxes so don’t expect the full amount to show up in your paycheck. However, companies must give employees the option of changing their W4 withholding amount to take home as much of the bonus as possible, then switch it back for the next pay period.
Employers, on the other hand, can deduct cash rewards given to employers as a business expense as long as they are consistent with “ordinary and necessary services they perform.”
Regardless of whether they are given to an employee as a reward for merit or to the winner of a contest, cash awards are always fully taxable as income. Richard Hatch, the first winner of the game show Survivor, found this out the hard way, when he didn't claim his million dollar winnings on his tax return.