Employee Meals for the Convenience of the Employer
An employee’s gross income includes wages, bonuses, benefits, and other perks – but does it include meals? Many companies provide employee meals at the workplace during crunch time and when employees are on call for emergencies. More recently, some employers have started to provide employees regular breakfast, lunch and dinner meals as well as breakroom snacks, claiming it is necessary for employee collaboration, comradery and wellbeing.
The IRS only approved tax-free meals where provided for a substantially non-compensatory reason. For the taxpayers, the IRS approved tax free meals for employees who need to remain on site for emergencies (e.g., technology support), but not for collaboration, comradery or wellbeing. The employer whose facts were the subject of this technical advice did not, in the opinion of the IRS, document instances where collaboration by specific individuals was needed, why and what specific discussions needed to be had in a secure environment, or that there was a lack of food establishments around the workplace available. Without this documentation, the IRS determined that the meals were not for the convenience of the employer and thus the value of the meals was a taxable fringe benefit.
One piece of good news was that the TAM determined that snacks and beverages provided in snack areas were tax free de minimis fringe benefits for employees. And remember, business meals (e.g., interview lunches, staff meetings over lunch on a not-too-frequent basis, lunches with current and prospective clients or customers) aren’t taxable to the employee – however, they are only 50% deductible. This recently released TAM is the result of an IRS audit and indicates that the IRS is focused on employee compensation, meals and other Form W-2 items, requiring employers to ensure that taxable amounts are properly reported on an employee’s Form W-2. Be aware that penalties for not reporting income can total as much as 50% of the unreported amount and that during any IRS examination, the IRS is likely to review three and perhaps four years of employment tax returns once an error is found. The IRS has voluntary programs that enable taxpayers to correct prior year mistakes which can sometimes avoid penalties and the need to involve employees in the settlement process.
If you have questions or concerns about this compensation and benefits issues, including employee meals and entertainment costs, contact Deb Walker or your trusted Cherry Bekaert professional. We are happy to help and look forward to giving you guidance for your specific situation.