IRS Aims to Tax Silicon Valley Workers’ Fringe Benefits

September 4, 2014

The Wall Street Journal reported this week that the IRS is looking to tax the free food that many Silicon Valley companies offer their employees.

“The IRS and U.S. Treasury Department last week included taxation of "employer-provided meals" in their annual list of top tax priorities for the fiscal year ending next June. The agencies said they intend to issue new ‘guidance’ on the matter, but gave no specifics about timing or what the guidance would say.”

The IRS believes that the regular free meals provided to employees are a fringe benefit and should be taxed like compensation.

Generally, there are two ways that the tax code looks at meals provided to employees. The code tries to distinguish between whether the meals are compensation (a regular payment in exchange for labor) or for the convenience of the employer (an expense necessary for an employee to do their job such as a meal for a worker on an oil rig in the middle of the Gulf).

If the former, the meal is taxable. If the latter, the meal is not taxable. The meals look more like taxable compensation to the IRS.

The most straight forward way to see the IRS’s argument is by comparing it to the current employer-provided health insurance exclusion, another hole in the income tax code that most people want to patch.

Currently, the fringe benefit of employer-provided health insurance is not taxable. The business purchases insurance coverage for its employees, deducts that cost from its taxable income, but employees do not have to pay tax on it. This exclusion in the income tax code amounts to a $143 billion loss in tax revenue, according to the JCT, which is the single largest tax expenditure in the tax code.

This is a large subsidy for employer-sponsored health insurance due to its special tax treatment compared to cash income. Suppose your current marginal tax rate is 25 percent. The after-tax value of $1 of cash income is $0.75 while $1 of health insurance is $1. This encourages companies to provide health insurance rather than a higher salary in order to attract individuals with high compensation packages.

The income tax should apply to the value of employer-provided health insurance.

The IRS sees free meals this way too and it makes sense.

Of course many people will see this differently and argue that these meals are not compensation, but should be treated as a convenience.

Ideally, the income tax would apply to all non-pension fringe benefits including meals (pensions would be taxable when paid out), but how you determine which type of meal is a fringe benefit and which is not will have to be left up to the lawyers.

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