The taxability and inclusion of meals in total compensation can be confusing. Three conditions determine how they should be taxed:
Were the meals furnished "in kind"? (The employer furnished meals, not groceries.)
Were the meals provided for the convenience of the employer? (The meals were furnished during or immediately before or after the employee’s working hours.)
Were the meals provided on the employer's business premises?
If an employer can answer “yes” to all three questions, then the cash value of employer-provided meals is not included in taxable compensation for FICA, FUTA, or federal income taxes. The taxability of employer-provided meals varies by state for income tax and unemployment insurance and by local tax jurisdictions for local taxes.
If an employer cannot answer “yes” to all three questions, the cash value of meals is considered compensation. In this situation, set up a non-cash fringe benefit to record the value of meals in payroll. Also, the value of these meals may be used to meet minimum wage requirements for employers subject to the Fair Labor Standards Act (FLSA).
The IRS has not placed a specific value on meals considered taxable compensation, but recognizes the meal values set by each state. If a state has not assigned a value, the employer may value the meal up to the “reasonable cost” without realizing a profit. A restaurant employer cannot use the public menu price of the meal because it includes a profit. Some states allow employers to use meal credits to meet state minimum wage requirements. The credit per meal varies by state, and in some cases, by employee type (for example, tipped employees versus non-tipped employees).
Lodging may also be taxable. These four questions determine taxability:
Was the lodging furnished "in kind"? (The employer furnished lodging, not the cash equivalent of the same.)
Was the lodging provided for the convenience of the employer? (The employee was required to be available for duty at anytime.)
Was the lodging provided on the employer's business premises?
Was the employee required to accept the lodging as a condition of employment? (It is necessary to carry on the duties of employment.)
If an employer can answer “yes” to all four questions, the employer-provided lodging is not included in taxable compensation for FICA, FUTA, or federal income taxes. The taxability of employer-provided lodging varies by state for income tax and unemployment and by local tax jurisdictions for local taxes.
If an employer cannot answer “yes” to all four questions, then the lodging is considered taxable compensation and treated as a non-cash fringe benefit. The value of taxable lodging may be used to meet minimum wage requirements. The IRS has not placed a specific value on lodging considered taxable compensation, but recognizes the lodging valuation set by the states. If a state has not assigned a value, the IRS recognizes the amount that is the reasonable prevailing value for lodging.
Check with your state for additional information.