Meals and lodging provided by an employer may be excludable from the employee’s income.
In certain circumstances, an employer may provide employees with meals and lodging as part of their employment package.
Generally, the value of meals and lodging provided to employees is taxable like many other benefits. However, the Internal Revenue Code provides an exclusion for meals and lodging that are provided “for the convenience of the employer” on the “business premises.” For lodging, an additional requirement is that the employee must be required to accept it as a condition of employment.
Convenience of the Employer
Under the “convenience of the employer” test, the primary reason for providing the meals or lodging must be to benefit the employer, i.e., to enable the employee to do his job. In a special circumstance, meals provided to all employees may be excludable where more than half of the employees fall under the convenience of the employer test. For example, if more than half of a hospital’s employees must be on call at all times, all employees can be furnished a meal in the hospital because keeping them on the premises allows them to satisfy work-related obligations. Similarly, a hotel manager who must be on the premises at all times can be furnished lodging at the location to enable him to perform his duties. However, for the lodging to qualify for the exclusion, the employee’s acceptance of the lodging must be a “condition of employment,” i.e., the lodging must be necessary for the employee to perform his duties. It is also important to note that the exclusion only applies for meals and lodging which is provided in kind: not for cash allowances for such items.
The “convenience of the employer” test and the business premises requirement may be difficult to apply to particular circumstances. With the ever evolving business environment that we work in today, employers will want to review and document all the facts involved in providing meals or lodging to employees.
If excludable benefits can be provided to your employees, you should be able to structure an employee benefit package at a reduced cost to take advantage of the employee’s tax savings. For example, if an employee spends $1,000 on meals at work he would need to be paid roughly $1,334 in taxable salary to cover this cost (assuming a 25% income tax bracket). But if the $1,000 in meals qualify as excludable under the rules discussed above, the employer can provide the meals directly and offer $1,334 less in salary while maintaining the employee’s economic position.
From the employee’s perspective, the excludable meals should be viewed as a benefit worth more in equivalent salary than their actual value.
Employers that can structure employee benefit packages to include excludable meals or lodging, should provide the employees with information on the effective value of the benefit. Keep in mind that these benefits must be for the convenience of the employer and in the case of lodging, included as a condition of employment. Before structuring a compensation package the includes meals and lodging, consult with a qualified tax professional.