Employer Cash Incentives To Employees For Hybrids

Many companies offer their employees cash incentives to undertake certain actions such as buying a hybrid car. It is important to remember that such situations have tax consequences

Employer Cash Incentives To Employees For Hybrids

Purchasing a hybrid vehicle makes sense on many fronts. It is a financial windfall given tax credits provided under the Energy Policy Act of 2005. Driving a hybrid has the additional financial advantage that one uses less gas, thus saving on fuel prices. Finally, hybrids are much easier on the environment given the fact they produce less pollution than traditional fossil fuel vehicles.

As is often the case, businesses tend to take action to promote socially positive steps before the federal government. Whether it is promoting healthier lifestyles or, in this case, a more green lifestyle, businesses almost always lead the way. The situation with hybrid cars is no different.

Many businesses are providing financial incentives to employees that purchase hybrid vehicles. These incentives can be significant. They often are offered in the form of cash payments, contributions to retirement plans and even stock options. As you might image, employees are taking advantage of the situation.

There is, however, one cautionary not for both businesses and employees when it comes to incentives for hybrids. The act of transferring wealth to the employees is considered a taxable event. Simply put, the employees must claim the amount of the incentive as income when reporting taxes. The employer is responsible for reporting said income as part of the reported W-2 wages and the employee must pay the relevant taxes.

There is one exception to this taxable income rule. If the employer is actually producing the product in question, then no taxable event occurs. In the case of the hybrid incentives, this exception would obviously only apply to employees of vehicle manufactures actually building the hybrids, to wit, Honda, Toyota, Ford, GM and so on.

The decision by many companies to offer incentives to motivate employees to purchase hybrids is laudable. It is important, however, that both employers and employees understand the tax consequences.