Tax free bonus scheme for employees

Setting up a tax-free bonus scheme for good ideas from employees is a good idea. Your employees might have valuable insights into how products, services, processes or systems can be bettered. If you pay a bonus to employees who come up with a good idea that pay would normally be taxed in the usual way. But if you set up a suggestion scheme, you can pay employees £25 tax free for the best ideas, and up to £5,000 tax free if the suggested improvement creates a significant amount of financial benefit for your business.

Usually, a bonus or award paid to you for outstanding work is taxable income shown on your Form W-2 that you must report on your tax return. You can exclude from taxable income on your tax return employee achievement awards you receive only if your employer can deduct the employee achievement awards on its tax return. To be tax deductible by your employer on its tax return, and excluded from your tax return, the employee achievement awards must meet all the IRS requirements. For a non tax qualified employee achievement award plans the tax deduction limit on the employer's tax return is $400 for each employee.