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The Practical Employer

The Practical Employer

There's No Such Thing as a Free Lunch

May 2, 2013
Related Topics: Finance/Taxes, Perquisites, Wages and Hours, Legal
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Your accounting records might soon look a little different—that is, if you provide perks at work such as free meals and if the Internal Revenue Service gets its way.

According to the Internal Revenue Code, certain employer-provided meals are exempt from the definition of "gross income" and, therefore, not taxed. To be considered non-taxed, an employer must provide a meal on its premises and for its convenience. Examples that might qualify:

  • Employees working at remote sites (e.g., oil rigs).
  • Emergency workers who have to be on-call.
  • Employees whose peak work coincides with the lunch hour (e.g., bank tellers).

Silicon Valley's tech companies are famous for the perks they offer to lure the best and brightest employees. One such perk—elaborately gourmet free meals (how does Facebook's spicy she-crab soup and grilled steak with chimichurri sauce sound?). Never one to leave money on the table, the IRS is reportedly examining the taxability of these meals.

From the Huffington Post:

The free meals that tech companies like Facebook, Google, and Yahoo provide their employees should actually be taxed. But what does that really mean? Who should be paying for these meals and where is the line drawn? According to Martin J. McMahon, Jr., professor of tax law at the University of Florida, companies like Facebook and Google report these meals as tax-free fringe benefits, when they should be considered taxable fringe benefits. The cost of these meals, McMahon explains, should be considered a part of the employee's salary. "Let's say that an employee gets $2,000 in free meals and makes $50,000 a year. The company should report to the IRS that it paid the employee $52,000 in compensation on which the employee would be taxed," McMahon says….As Professor McMahon explained … : "A company cannot provide tax-free meals if workers commute from home and have the ability to bring their lunches with them."

I'm not a tax attorney. I don't want to be a tax attorney. This might be the only tax-based post I will ever write. Here's what to take away from this story. If you provide free food to your employees, however, you might soon need to start accounting for that food as a taxable benefit instead of tax-free benefit.

Written by Jon Hyman, a partner in the Labor & Employment group of Kohrman Jackson & Krantz. For more information, contact Jon at (216) 736-7226 or jth@kjk.com.

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