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04/14/2013

No More Free Lunch? : The Debate on Employee Benefits & Free Food

Could you be taxed for the free donuts and coffee your employer provides you at work?  There’s new debate about whether such freebies can be considered employee benefits, and thereby, be taxable as income to you.

This controversy adds yet another dimension to arguments over who will be targeted and in what way in the ongoing search for more tax revenues to lift ailing budgets.

Chef in hat 1Reports confirm the IRS is investigating the practices of large corporation complexes in the Silicon Valley where free meals are provided to employees round the clock.  Most tech companies with huge campuses provide employees free meal services claiming workers in rural and often highly secure environments don’t have enough time to take an off-campus food break.  

Some companies categorize the 24x7 meals and appetizers prepared by chefs and elaborate trendy "snacks" as a vital part of enhancing collaboration, motivation and dedication.

Investigators say tax rules “categorize meals regularly provided by an employer as a taxable perk, similar to personal use of a company car.” Meals may remain untaxed if they are served for reasons such as workers being in remote locations, but tax experts aren’t certain that tech company campuses qualify as “remote”.  They say it’s an issue of fairness to ensure that workers at large corporations with higher than average salaries are paying their fair share of taxes.

How far could these tax laws reach?  Some say hundreds of millions of dollars in taxes could be involved.  For example, at $8 to $10 a meal, times two per day, some employees may be responsible for taxes on benefits that reach $4,000 to $5,000 annually.

Arguments are being made that if some employers are allowed to offer tax-free perks, it puts other employers and employees at an unfair disadvantage; and if left unchecked, could become a standard.

Technically, any unpaid back taxes for free benefits would be owed by individual employees, but in practice the IRS typically cites the employer for failing to withhold taxes.  Tax attorneys say large companies usually settle with the IRS for the fair-market value of the freebies by including the dollar amount in paycheck stubs and then the companies give workers a raise to cover whatever the larger tax bill would be.

On the other  side of the debate, small business advocates fear widespread enforcement of such tax rules would mean the end to things like free coffee and donuts, and success celebrations at their offices.

But, good news, under current tax laws coffee and donuts and occasional office parties are excluded from taxation.  Employees who work for restaurants and hospitals may also receive meals on site without those meals being considered taxable benefits.  

The tax rules for employee fringe benefits are extensive.  Taxpayer advocates say employer-provided meals are one of many kinds of benefits that are under scrutiny as law makers and regulators intensify their search for ways to collect more tax revenues using current tax codes.

Contact us at McRuer CPAs for more information.

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