No Such Thing as a Free Lunch: Taxing Corporate Perks

Silicon Valley startups like Google and Facebook famously use perks like on-site chefs, yoga classes and free shuttle services to attract and retain top talent in a competitive recruiting landscape. And it's not just tech startups that offer these perks. Employers in other sectors are expanding their perks as well. A 2012 USA Today survey found that employee-paid benefits have risen from 16.6 percent of total compensation in 2000 to 19.7 percent in 2011. Back in the 1960s, it was less than 10 percent.

But the gravy train may be leaving the station for the last time. After employment-tax audits over the past several years, the IRS is reviewing this practice and considering whether these corporate perks should be considered a taxable fringe benefit. In fact, the IRS listed "employer-provided meals" in its annual list of top tax priorities for the fiscal year ending in June. Their concern is that employers are skirting tax laws by providing free meals, costing the IRS millions of dollars in tax revenue. Others say that when some employees enjoy free, untaxed meals, while others buy meals with after-tax dollars, it creates an unfair advantage for the former.

Like personal use of a company car, meals regularly provided by an employer on the employer's premises can be considered taxable benefits (the IRS excludes coffee, doughnuts, soft drinks, occasional parties or picnics for employees and the value of on-premise athletic facilities mainly used by employees and their family members). The issue gets a bit cloudier, though, when meals are served for a "non-compensatory" reason for the "convenience of the employer." If proper meals are not otherwise available—for instance, if the facility does not have sufficient eating facilities nearby such as a logging camp or an oil rig in a remote location—then employer-provided meals are not taxable.

Companies could argue that the purpose of free lunches is to keep employees productive and in the office rather than letting them drive away to pick up their own meals. Making this argument in a densely populated city like New York, where delis and quick-serve restaurants dot every block, may not fly, but on a sprawling Silicon Valley campus with few nearby options, the case for this argument may be slightly stronger. However, touting this benefit as an employee perk during the recruitment process could negate the argument that meals are offered for employer convenience.

If the IRS determines that these employer-provided meals are taxable benefits, then employees could be charged back taxes on the fair market value on the free meals they enjoyed. To put this in real numbers, the Wall Street Journal estimates that a Googler eating two meals per day in the company cafeteria would owe an extra $4,000 to $5,000 per year in taxes (assuming a fair-market value between $8 and $10 on each meal).

But a more likely outcome, according to the Wall Street Journal, would be to penalize the employer for failing to withhold taxes on a taxable benefit. Going forward, employers would be expected to withhold taxes for these taxable perks, but some experts predict that companies would simply pay employees more so they wouldn't notice a reduction in pay. Others foresee large employers challenging the taxability of these perks in court.