Our company recently implemented a rewards programs in which employees can earn points and redeem them for rewards.  Our company already prepaid the points and the applicable sales taxes to the vendor administering the rewards program.  As current employees redeemed their points, we report the fair value (regardless of the amount) of what the employees redeemed on their paycheck so they can be taxed and included on the W2.   We don't make a distinction of how much of the points redeemed were from service awards versus performance awards.  In my research, it looks like the IRS allows a certain amount that can be exempt for tax reporting if the reward has something to do with service.  Should we be reporting everything or should we try to distinguish the portion of the points that is taxable?

For employees who separated, they are given three months from the separation date to complete the redemption of any rewards points.  If they redeemed $600 or more worth of points, our plan is to report this under 1099 Misc.  If it's below $600, then we don't report.  Again, we don't make a distinction of much of the points were for service versus performance.  We also don't report if the employees who separate chose not to redeem the points for rewards.  Please advise if this policy is in compliance with the IRS requirements.