No Such Thing As a Tax-Free Lunch

9/10/2014

Silicon Valley's high-tech employers are famous for feeding their employees at work. It's not entirely selfless — feeding people helps attract talented workers and keep them chained to their desks. At this point, it's no longer a novelty — it's an expected part of Silicon Valley culture. Companies routinely make headlines for luring away each others' executives and programmers. But back in 2008, Facebook made headlines for poaching Google's chef!  

Employers know that if they're going to use lunch to compete for talent, it ought to be good. The average computer nerd may be perfectly happy scarfing down Cheetos in his parents' basement. But six-figure software engineers demand more. So, for example, Google offers employees 30 different "cafes" at their Mountain View campus, serving delicacies like squash-corn-pecan dumplings, and daal saagwala from Northern India: "a mix of soft kale, spinach, and mustard greens, tossed with three types of beans and lentils in a broth singing with distinct cumin notes and a pleasant cilantro flourish." The best part? It's all free! But that may not be true much longer, if the food critics at the IRS have their way. Last month, they released their 2014-2015 Priority Guidance Plan, which reveals their 317 priority "projects we intend to work on actively during the plan year." And there on Page 7, sandwiched between "Regulations under §86 regarding rules for lump-sum elections" and "Regulations on cafeteria plans under §125," you'll find "Guidance under §§119 and 132 regarding employer-provided meals."  

Ironically, free lunches have nothing to do with "cafeteria plans." The relevant regulations at 26 CFR 1.119-1 provide that "The value of meals furnished to an employee by his employer shall be excluded from the employee’s gross income if two tests are met: (i) The meals are furnished on the business premises of the employer, and (ii) the meals are furnished for the convenience of the employer."  

Sounds pretty straightforward, right? Marketing software maker Moz.com gives employees a never-ending cereal bar. They serve it at their business headquarters, and they do it to keep employees from running to the In-N-Out Burger down the street. So what's the problem? Well, the IRS thinks that all that Cap'n Crunch may be more than just a convenient employee perk. They're worried that it's actually disguised compensation. If the IRS concludes that meals are part of compensation, they'll be included in employees' W2s and taxed just like the rest of their paychecks. And while the occasional daal saagwala might not sound like much, those meals can add up fast. Let's see here . . . 1,000 employees eating $8 meals, five times per week, adds up to $2 million in new taxable income per year from just this one example — plus more for Social Security and Medicare.