Is There Such Thing as a Free Lunch?
April 19, 2013
When considering the opportunity cost of an activity or transaction, economists conclude that there is no such thing as a free lunch. However, many companies offer their employees “free” perks of employment that do not cost them anything out of pocket. Bloomberg, Facebook, and Google are well known for the gourmet food and snacks that they offer for free to all of their employees. Other companies offer employees free access to a gym or an employee discount. But these freebies are not always as sweet of a deal as they appear.
These benefits to employment are called “fringe benefits” and are defined by the IRS as a form of pay for the performance of services. Fringe benefits are taxable unless exempt by law. Qualifications for exemption are specific, and companies and the IRS sometimes clash over the specifics.
“De minimis benefits,” which are defined as any property or service provided by an employer that has such a minimal value that the costs of tracking and accounting for the benefit would be unreasonable to administer, are an example of exempt benefits. However, the frequency of the provision of the good or service must also be considered when assessing the value of the benefits. The provision of coffee or the occasional meal would be exempt as a de minis benefit. However, as the frequency of meals increases the question of exemptions becomes more complicated.
Meals provided on the business premise must be provided for the employer’s convenience to be exempt. The convenience provided to the employer by providing the meal must be for a substantial business reasons besides provision of additional pay. Determining what constitutes “convenience” will depend on the facts and circumstances.
The IRS describes that meals to food service employees during or immediately before or after the employee’s shift would be considered to be provided for the convenience of the employee by allowing the employee to work through breakfast, lunch, or dinner shifts. Employers’ provision of meals to employees that respond to emergency call may also be exempt. A meal may be exempt if the nature of the business allows the employee insufficient time to eat off the business’ premise. If a lack of eating facilities exists in the surrounding areas near the business premise, employers may be exempt for providing a proper meal that would not have been available without the furnishing of the meal by the employer. The IRS also clarifies that meals offered to promote “goodwill, boost morale, or attract prospective employees” do not constitute convenience for the employer that is necessary for exemption.
Exemptions for fringe benefits are also complicated with common employee provisions of an athletic facility, an employee discount, or lodging. For example, the provision of a health club membership to a third party provider of an exercise and sports facility would be taxable as pay on an employee’s W-2, but an employee owned facility that operates using employee wages and predominately is used by employees and their family would likely be exempt. Also, the cost of the lodging is only excludable if it is a requirement for employees to properly perform their duties and responsibilities – such as an overnight camp cabin counselors. Additionally, employees may often receive an employee discount on purchases. However, only a limited amount of employee discounts are excludable from taxes.
As more companies offer in-house meals to employees and other similar perks, tax experts have been debating and often disagreeing on what constitutes convenience to the employer and whether the exclusions currently allowed are fair. Thus, before you indulge in your fringe benefits or envy your friend at Google, remember to double check your pay stubs or W-2 tax statements before you realize too late that there really is no such thing as a free lunch.
For further reading on fringe benefits, see below: