The IRS has become a much more frequent visitor to college and university campuses across the country. As part of their standard audit program when they arrive on campus, the IRS looks at the treatment of gifts, prizes and awards by the university to determine that these have been recorded properly for tax purposes. It is our goal to be in compliance with IRS regulations in the event of such an audit.
In general, the tax reporting rules are the same for gifts as they are for prizes and awards. They are treated as taxable income to the employee, student or non-employee that receives them. The amount of the gift to an employee must be included in their W-2 and is subject to all income and FICA withholding taxes unless the gift is a length of service award as defined in the table below. Gifts to students and non-employees are reportable on a 1099-MISC.
Prizes and awards are typically gifts of cash, gift cards or other tangible personal property bestowed on university faculty, staff, students or non-university individuals in recognition of outstanding achievement in teaching, research, academic performance or other performance-related activities. Gifts are typically cash or other tangible personal property given to faculty, staff or students in recognition of, or in connection with the holiday season, retirement, or some other purpose not specifically related to job performance.
The Gift, Prize or Award Form must be used to report any gift, prize or award given, regardless of the amount.
Tax Consequences
In almost all circumstances, gifts, prizes and awards are included in the recipient’s gross income, if the gift is paid for by the university (either directly or indirectly). Other than for the limited exceptions noted below, if the recipient is a member of university faculty, staff, student employee (or their spouse), the gift, prize or award is considered supplemental wages and must be processed through the payroll system with appropriate federal, state, city and FICA/Medicare taxes withheld. The gift, prize or award is then included in the recipient’s Form W-2, Wage and Tax Statement.
Gifts of tangible personal property (other than cash or cash equivalents, such as gift certificates) of less than $75, in total per year, are excludable from gross income. For example, the value of a turkey, ham or other item of merchandise of nominal value distributed to an employee at Christmas is not taxable. However, any gift of cash (including gift certificates) is considered completely taxable from the first dollar given. Tangible personal property given to an employee for performing a specific task for the university is taxable income to the employee, even if the value of the gift is less than $75.
All annual non-cash gifts of $75 or more, individually or in the aggregate, all cash gifts, and all gift cards must be reported on the Gift, Prize or Award form. Such reportable gifts, prizes and awards include items given to employees and directly charged to your budget unit (e.g. something purchased at the bookstore) or purchased using the procurement card.
For non-university recipients, the prize or award can be processed without tax withholding* (except for payments to non-resident aliens which may be subject to withholding – see Note below) but is still considered income to the recipient. Such payments are reported as taxable income to the recipient using Form 1099-MISC, Miscellaneous Income.
For students, if the prize or award is related to employment services performed for the university (e.g., outstanding student worker in a department), the prize or award must be processed as supplemental wages with appropriate income taxes withheld. However, if the award is not related to services performed as an employee (e.g., the Beta Alpha Psi Accountancy Award), it is still taxable income to the recipient and must be reported on Form 1099-MISC, but it is not subject to withholding.*
*Note: There are special withholding rules related to payments made to nonresident aliens (faculty, staff, students, and non-university recipients). Please contact Erica Rankin (ericar@wustl.edu) in the Tax Department regarding these requirements.
For gifts, prizes and awards to employees, the department may request that the Payroll department “gross up” the value of the gift, prize or award, so that the net payment is the desired prize or award amount. For example, an employee receives an award valued at $100. The employee will incur payroll tax withholding on the value of $100. The exact amount will depend on the employee’s personal payroll tax withholding elections. For this example, assume a 25% withholding rate and that $25 will be withheld from the employee’s paycheck. If the department would like to pay the $25 tax related to the award, the value of the award is “grossed up” to $133.33. The employee will receive a net value of $100 after tax ($133.33 x 25% = $33.33 tax; $133.33 – $33.33 = $100.00). The department will be charged the additional $33.33.
Exceptions
Certain employee achievement awards (items of tangible personal property) if awarded under a university-wide length-of-service or other achievement program may be excludable from gross income. Please refer to the table below. Gift cards are always taxable income to the employee and do not qualify under this exclusion. If you believe the prize or award you are processing qualifies under this exception (note that it must be tangible personal property, and this is typically not gift certificates), please contact the Tax Department.
If a gift is paid for by an individual and not reimbursed by the university, then that gift is not reportable by the university.
Examples
| TYPE OF AWARD | TAXABLE | CONDITIONS |
|---|---|---|
| Cash | Yes |
|
| Cash Equivalents, including Gift Cards and Gift Certificates | Yes |
|
| De Minimis | No |
|
| Length of Service Award | No |
|
| Length of Service Award | Yes |
|
| Retirement gift | No |
|
| Retirement gift | Yes |
|
| Student Achievement Award | Yes |
|