Cash Awards Definition

What Are Cash Awards?

Cash awards are awards given to employees in the form of money or another asset, such as stock optionsthat can be turned in for cash. Cash awards are given to employees for meeting or exceeding goals for a special project or their regular job functions, on an anniversary date, or even the holidays.

Key Takeaways

  • Cash awards are awards given to employees in the form of money or other assets that can be turned in for cash.
  • Cash awards are given for meeting or exceeding performance goals, work anniversaries, or during the holiday season.
  • The use of cash awards is intended to incentivize employees and retain top-performing and knowledgeable personnel.
  • Items that can be cash awards include stock options, gift cards, or profit-sharing plans.
  • Cash awards are taxed for the recipient and can be deducted as a business expense for employers.

Understanding Cash Awards

A cash award is intended to show employees appreciation for their work and time at a company. While a commendation or acknowledgment of a job well done in a company newsletter or meeting 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 a far more concrete measure of appreciation, loyalty, and stability.

The practice of handing out cash awards is often a win-win situation. The employee’s self-esteem, confidence, and bank balance grow, while employers are often rewarded by the ability to retain hard-working, knowledgeable, and experienced personnel. Retaining top-performing employees is the primary goal of handing out cash awards.

Cash awards can come in many forms, such as a one-time bonus, profit-sharingstock options, or gift cards. Anything that can be exchanged for cash falls into this category. Depending on the situation, an employer will provide a different type of cash award.

For example, stock options usually don’t vest until further down the line, so the immediate benefit is not there. It also requires an individual to stay with the company for longer. A bonus, on the other hand, is an immediate deposit of cash into an employee’s bank account that can be used immediately.

When employees hit anniversary milestones, usually five years, ten years, or more, they are given the choice of a gift from a prestigious store. Watches, jewelry, and other expensive items are usually gifted, often at the choice of the employee receiving the gift.

Cash Awards and Business Difficulty

Cash awards are particularly important in times of company or economic downturns when employers are at risk of losing talented employees. Handing out a cash award can incentivize an employee to stick with the company through hard times, even though they may be receiving job offers elsewhere.

This greatly benefits a company as well because the cost of a cash award is often significantly less than having to hire a new employee and train them. Retaining key employees is critical to helping a company survive through difficult periods because it is most often the top performers or strategic thinkers that will see the company through any negative business cycle.

If the employee is particularly talented, a cash award may not be enough if they are receiving good job offers, however. In this case, a company might have to promise salary increases and other benefits once it turns the corner.

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 the full amount won’t show up in your bank account. 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 the work that they do.

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.

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