Answer to Question #294658 in Management for jean

Question

In your own opinion, should the benefits or incentives given to an employee be taxed? Why or why not?

Answer 1

Benefits are a highly effective way of preventing people from leaving a company. Incentives are linked to an employee's performance, so they work in the same way as a prize. The value of the incentive is usually connected to the results obtained. Most companies want to hire the most qualified employees and keep those employees loyal and productive. To attract and keep their best employees, companies provide a package that includes compensation mostly in form money, incentives like special perks or rewards for good work, and benefits such as health insurance or a paid vacation. Yes, benefits or incentives given to an employee should be taxed.

 The federal income tax considerations for incentive programs are often overlooked. While it is difficult to give technical tax advice that would apply equally to all incentive programs, following certain general income tax principles can make an incentive program more successful and avoid unpleasant surprises. As a general rule, incentive prizes and awards given to individuals to reward them for certain achievements are taxable as ordinary income regardless whether the prize or award is in the form of cash, merchandise or travel. If the prize or award is merchandise or travel instead of cash, the fair market value of the item must be included in income. What constitutes fair market value depends on the item and whether it is merchandise or travel. A bonus/incentive is always a welcome bump in pay, but it's taxed differently from regular income. Instead of adding it to an individual’s ordinary income and taxing it at the top marginal tax rate, the IRS considers bonuses to be ‘supplemental wages’ and varies based on the source of the income and it ranges between 1% to 30%.