Employee Incentive Program

What is the name of your state? New York.

Hi, I have a question concerning gifts. Firstly at my company there is an Employee Incentive Program where employees are given a Point Redemption Certificate (worth 5 points to 40 points) for helping out each other. Now once an employee accumulates these points they can then turn them in for a number of gifts. The gifts are worth different points. The problem is the employees are being required to pay ridiculous taxes on these gifts. For instance an employee selected a phone with a retail value of $ 100.00 and ended having $99.00 deducted from her paycheck for taxes. Is this legal? Please advise.
Thank you.

State and federal IRS regulations basically say that any tangible "consideration" an employee receives from their employer is taxable income. So in your scenario, if the employee received a gift with a value of $100 from the employer, then their wages must be "grossed up" by $100 and taxes computed. Because of the way payroll software operates, too much is withheld for taxes in that pay period. For example, if you are non-exempt and work a fair amount of OT in any given pay period, you'll notice a disproportionate amount of taxes are withheld the week you are paid for the overtime.

Basically, payroll software works as follows:

1. It presumes that whatever actual gross wage you receive in any given pay period is what you will be receiving in each pay period for the entire calendar year.

2. It then calculates what taxes have to be withheld in that pay period in order for that employee to have sufficient taxes withheld at year end.

Ex: if you normally earn $500/week, then the software figures you're going to earn $25,500 for the year and calculates the taxes for that one week accordingly. If, however, for one week you earn $1,000, the payroll software figures you're going to be earning $52,000 that year and calculates taxes for that one week accordingly. In other words, the employee will be significantly over-withheld in state and federal taxes for that pay period because in reality, the employee is only going to earn $26,500 for the year.

The good news is that when the employee files their year-end tax return, any taxes that have been overwithheld will be refunded.

I can't tell you specifically why $99 in additional taxes were withheld from your co-worker's paycheck that week because (a) I'm not a payroll person, (b) I don't know what her withholding level is (S-1? M-3?), and (c) I don't know what tax bracket she's in. I can tell you if that $100 happened to kick her into the next higher tax bracket for that pay period, what you describe is possible. As I said though, if she's been overwithheld, she'll get it all back when she files her tax returns.