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The IRS Makes it Official: Say So Long to the Free Meal Perk

Will the taxman to take a bite out of your employee perks?

For a certain sort of young employee—the kind who's come up through fast-paced, hard-driving technology companies—the notion of brown-bagging it to the office or heading out to a restaurant for lunch be a foreign concept. The rise of tech giants like Google, Twitter and Facebook has made free meals, as well as massages, gym facilities and other cushy perks, an expected part of the job for many of today’s workers. But new signals from the IRS have some worried about the future of such on-the-job benefits.

You’ve probably seen the recent media coverage highlighting the attention the tax agency is now paying to employee freebies during routine audits. In fact, the IRS and Treasury Department both recently included taxation of "employer-provided meals" on their annual list of top tax priorities for the current fiscal year. Some reports suggest that the government sees going after free employee meals as a worthwhile investment to bring in more tax dollars--the total cost of companies writing off meals is about $2 billion a year.

The question at hand boils down to this: are the meals a benefit for workers or for their employers?

U.S. tax guidance says meals provided "for the convenience of the employer" don't have to be taxed. For example, providing food to a worker on a remote oil rig, or a casino employee who faces tight security leaving or entering the building might be crucial to the business's smooth operation.

Of course, tech companies’ gourmet offerings don't always sound like a simple solution to keeping workers productive. After all, cafes at the Googleplex famously offer dishes like Grilled Chicken Breast with Pomegranate and White Balsamic Gastrique and Tomalas Bay Mussels. Business Insider reported that Google spent about $20 per employee per day—or $80 million a year—on food costs in 2008, and the price has likely gone up quite a bit since then.

 But Proformative Advisor Wayne Spivak, president and CFO at SBAConsulting, said there's good reason to see free meals as primarily benefiting the employer. Bringing workers together in a company cafeteria may produce results that couldn't be achieved otherwise.

"You're in a different atmosphere, and, especially with the high-tech companies, you start talking, and you come up with solution X because you're talking with people with different ideas," Spivak said. "That may not happen if you're sitting in your cubicle."

But the IRS doesn't seem to be listening to that argument. If you're the CFO of a company that offers free meals, your situation right now boils down to three main choices:

1. Tax the food

"The very conservative, prudent thing to do would be to tell your employees it is a taxable benefit, attribute a value to it, and tax it at payroll levels," said attorney David F. Faustman, office managing partner of Fox Rothschild LLP's San Francisco office.

For tax purposes, the value of the benefit would be added to each worker's pay and treated just like a cash payment, Faustman said. If a company chose, it could "gross up" payroll checks so workers wouldn't feel the change.

Faustman said it's important for any employer going this route to think through all the implications, from compensation to morale. For one thing, he said, counting the meals as part of overall compensation would change the legal base rates for hourly employees, meaning that overtime wages would need to be recalculated.

2. Sue the taxman

Faustman said it's possible that companies objecting to the "midstream" change in the ground-rules for taxable benefits might litigate against federal or state tax agencies that start targeting free meals. In particular, he said, a class action suit is a possibility, with lawyers likely to argue that "there are pennies at stake for the particular employees but in the aggregate it can amount to a huge wage-and-hour class action."

3. Eliminate the free meals

Simply cutting out the benefit, closing down food services or charging a fair market price for each meal could be the best solution for some companies. "That's a CFO question," Faustman said. "Do we really want to go through all the hassle of this? Is it really worthwhile? Is it good for morale, is it good for productivity, or is it more trouble than it's worth?"

Spivak said that's how he imagines things will go down at many companies.

"They'll go to their CPA, who will probably say 'you're going to have to tax it because otherwise we'll have to jump this hurdle and that hurdle,'" he said. "The company will probably just cancel the program. And that will hurt productivity."

Employers may not have to make that call just yet. CNN reports that, if the IRS officially changes its guidance on meals as a convenience for employers, it could take nine months to a year for the new rules to take effect. In the meantime, employees should be sure to relish every tax-free bite.

Livia Gershon is a freelance writer in Nashua, N.H. 

Comments

Anonymous
(Board) |

First is meals... next is coffee / tea. How about water coolers, should the water be taxed? Don't forget the A/C.

DANIEL POIRIER
Title: Chief Financial Officer
Company: Pro Tech International
(Chief Financial Officer, Pro Tech International) |

The government already disallows 50% of the deduction companies could take for meals & entertainment. Now they want to go after the employees too. I think this is pushing too far, but I guess the government has to pay for ACA somehow.

Mario Parada
Title: Accounting Manager
Company: Puma Biotechnology, Inc.
(Accounting Manager, Puma Biotechnology, Inc.) |

Dan, that is an excellent point. The states will definitely come after their share of the pie.

As employees were are taxed at the highest rates, what we need to be doing is innvesting to offset our ordinary income then we would not be worried about another $100 of income per week of taxable earnings.

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

Next target Rewards Programs - The government has always toyed with the idea of taxing airline miles programs; which would link into hotel reward programs.

Jeff Durbin
Title: Chief Financial Officer
Company: F. Gavina and Sons, Inc.
(Chief Financial Officer, F. Gavina and Sons, Inc.) |

There are some pretty substantial obstacles for them to do this - in spite of the feds' insatiable quest for our hard-earned money. The folks who benefit from this road-warrior perk are spread across the political spectrum and would raise holy heck with their representatives in Congress.

Lewis Jr
Title: Treasurer
Company: Public Utilities Reports
(Treasurer, Public Utilities Reports) |

Well, this should be interesting. what constitutes a meal? i.e. donuts and bagels or only if all or most of the food groups are represented? Will it be considered a benefit if it's offering is sporadic in nature or does the offering need to be consistent? If so, how consistent?

Doesn't seem like it can be a black and white or cut and dry regulation. Could affect a whole lot more companies than the esoteric ones it seems to be aimed at.

Philip Scheuchenzuber
Title: Controller
Company: Horst Realty Co
(Controller, Horst Realty Co) |

All my income is taxed, so I say tax the spoiled little brats in silicon valley!!!!!

Jeff Durbin
Title: Chief Financial Officer
Company: F. Gavina and Sons, Inc.
(Chief Financial Officer, F. Gavina and Sons, Inc.) |

I agree with Anonymous. The government taxes way too much as it is.

Anonymous
(Controller) |

Can't you say something constructive instead?

Dan Berguson
Title: Treasurer
Company: Kingdom Inc.
(Treasurer, Kingdom Inc.) |

Don't forget that the state taxman will want his share too. Sales tax on those meals is yet another concern. The states are hungry for tax revenue and they will come looking for their share as well.