That’s according to a recent Wall Street Journal article, which says the IRS is examining whether the free food enjoyed by employees is a fringe benefit on which they should pay additional tax.
What’s piqued the taxman’s interest, it seems, is why grub is being provided gratis to employees. Or at least how firms describe their reasons for doing it.
According to tax rules, offering free food as a way to promote morale or attract prospective employees is considered taxable compensation. The Journal article notes, however, an exception that allows employee meals to remain untaxed if they are served for a “non-compensatory” reason for the “convenience of the employer.” This exception has typically been applied to remote workers, or those in professions in which reasonable lunch breaks aren’t feasible.
According to the Journal piece, though, some attorneys argue that various technology firms could qualify for the exception, “in part because free food encourages longer work hours and is a crucial part of Silicon Valley’s collaborative culture.”
University of Florida tax-law professor Martin J. McMahon doesn’t go for that idea at all. He thinks employees at companies such as Google—famous for the elaborate and eclectic culinary options it makes available to its people—should be paying their share.
“I clearly think it ought to be taxable income,” he told the paper.
“I buy my lunch with after-tax dollars,” says McMahon, who contends that free meals should often be considered part of compensation packages. “And I have to pay taxes to support free meals for those Google employees.”
(Curious how much a food tax would cost the average Googler? Assuming a fair-market value of between $8 and $10 per meal, a Google employee eating two meals on campus each workday could be looking at taxes on an extra $4,000 to $5,000 a year, according to the Journal.)
The IRS may share McMahon’s opinion, and “often takes a dim view” of employers’ claims that free food is integral to maintaining a collaborative corporate culture, according to employment-tax attorney Thomas M. Cryan Jr., a shareholder with Washington-based firm Buchanan Ingersoll & Rooney.
Cryan Jr. told the paper that he’s worked on audits for multiple Silicon Valley-based tech firms, and has seen the IRS question companies’ practices surrounding complimentary meals. He offered a few words of caution:
“If they’re in there auditing, and you’re not taxing the meals, they’re going to challenge you on it.”
Employers, he says, typically settle and determine a fair-market value for the meals, which they include in employees’ future paycheck stubs. In these instances, firms frequently give employees a bump in pay, to cover their bigger tax bills.
And, a failure to carefully and correctly treat the taxation of employee meals could prove even costlier for the company. While individual employees would technically be on the hook for any unpaid back taxes, experts say the IRS is more likely to pursue the employer for failing to withhold taxes.