When an employer provides an employee with a benefit, it is almost always considered taxable compensation to the employee (unless specifically exempt from taxation as provided in the Internal Revenue Code). Accordingly, the value of meals that an employer provides an employee generally must be included in the employee’s gross income (W-2 salary) for tax reporting purposes. There are, however, two exceptions to this rule.
The first exception is when meals (or meal money) are provided to employees on (1) an occasional basis, (2) it is needed because the employee is working overtime, and (3) the provision of the meal enables the employee to work overtime. Meals or meal money that meet these rules are considered to be a de minimis fringe benefit the value of which is not included in the employee’s gross income. A de minimis fringe benefit is any property or service for which the value (taking into account the frequency with which you, the employer, provide similar fringe benefits to other employees) is so small that accounting for it is unreasonable or administratively impractical.
What about those employees who are required to work overtime more often than occasionally? In these cases, the value of employer-provided meals (does not include meal money) can be excluded from an employee’s gross income if the meal is furnished (1) for the convenience of the employer, and (2) on the business premises of the employer. Whether a meal is provided for an employer’s convenience can only be decided on a case-by-case factual basis and this is the where the slope becomes very slippery. While a lumberjack working in a remote location who has his meal provided to him by the employer would likely sustain IRS scrutiny, the IRS is currently looking at the free meals provided by technology companies in Silicon Valley. While the free meal offered to a Silicon Valley employee may be a way to attract a key employee, is such a meal for the benefit of the employer? The IRS believes that this second exception is being abused by the technology companies and may find that these companies have unreported W-2 income, owe payroll taxes, and possibly have benefit plan issues where the benefits are based on the employee’s compensation. Without any doubt, the IRS will closely scrutinize employee hand-books, manuals, and company policies when auditing this issue.
Since these rules can get rather complicated, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation with an experienced tax professional regarding your tax preparation and tax planning strategies. You can also schedule a consultation at Click Here.