1-2: Incentive awards and bonuses

Effective: July 1, 1994
Revised: October 15, 2025
Approved by: Van Christensen
References: Admin Rule 477-6-7, IRS Publication 15-B

Purpose

This policy outlines the types of incentive awards that may be given and their taxability. It is written to comply with IRS regulations and Administrative Code.

This policy does not address the specific way to make a payment or the system to use. See policy 1-1: Employee payments general policies and procedures.

Definitions

Agency – Any agency, board, bureau, commission, office, department, or other administrative subunit of the executive branch of state government.

De minimis fringe benefits – A small benefit provided by an employer that is so minor and infrequent that accounting for it would be unreasonable or impractical.

Policy

A – Agencies may issue incentive awards and bonuses to employees

1 – Agencies must comply with Administrative Rule 477-6-7 when issuing incentive awards and bonuses.

2 – Agencies may pay length-of-service and retirement awards based on their agency’s incentive awards policy.

B – Cash incentive awards are taxable

1 – Cash incentive awards and bonuses are taxable income to the employee.

C – Cash equivalent incentive awards are taxable

1 – Agencies may give cash equivalent incentive awards, such as gift cards, movie passes, admission tickets, etc. to employees.

2 – All cash equivalent awards, no matter the amount, are taxable income to the employee.

2a – Agencies must report all cash equivalent awards, by employee, to payroll using wage type 1128.

2b – When purchasing gift cards, agencies must follow Finance policy 5 –27: Gift cards.

2c – Because of the potential tax liability to the state, agencies who do not follow section C2a and C2b may have privileges of buying and awarding cash equivalents taken away.

D – Non-cash incentive awards must be de minimis to be nontaxable

1 – Agencies may give non-cash (tangible) items, such as apparel and consumables, to employees as incentive awards.

2 – Non-cash incentive awards are nontaxable to the employee as long as the item is considered a de minimis fringe benefit by the IRS.

2a – Non-cash awards must not:

exceed $99 per occurrence,
be routine; and
exceed $396 in a fiscal year.

3 – Non-cash incentive awards are taxable to the employee if the value of the gift exceeds $99 or the gifts are routine regardless of the amount.

3a – Agencies must report all taxable non-cash awards, by employee, to payroll using wage type 1112.

E – Incentive awards must be properly coded

1 – Object code 5155 must be used for purchases of cash equivalent awards and taxable non-cash awards.

2 – Object code 6270 must be used for purchases of nontaxable non-cash incentive awards.