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This exclusion applies to the value of any tangible personal property you give to an employee as an award for either length of service or safety achievement. The exclusion does not apply to awards of cash, cash equivalents, gift certificates, or other intangible property such as vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, and other securities. The award must meet the requirements for employee achievement awards discussed in chapter 2 of IRS Publication 535, Business Expenses.  

For this exclusion, treat the following individuals as employees:

• A current employee.
   
• A former common-law employee you maintain coverage for in consideration of or based on an agreement relating to prior service as an employee.
   
• A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control.

Exception for S corporation shareholders:

Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power.

Exclusion from wages:  

You can generally exclude the value of achievement awards you give to an employee from the employee's wages if their cost is not more than the amount you can deduct as a business expense for the year. The excludable annual amount is $1,600 ($400 for awards that are not “qualified plan awards”). See chapter 2 of IRS Publication 535 for more information about the limit on deductions for employee achievement awards.

To determine for 2007 whether an achievement award is a “qualified plan award” under the deduction rules described in IRS Publication 535, treat any employee who received more than $100,000 in pay for 2006 as a highly compensated employee. 

If the cost of awards given to an employee is more than your allowable deduction, include in the employee's wages the larger of the following amounts:

• The part of the cost that is more than your allowable deduction (up to the value of the awards).
   
• The amount by which the value of the awards exceeds your allowable deduction.
   

Exclude the remaining value of the awards from the employee's wages.