Watch out: Free lunch at work could be taxable

Some Silicon Valley businesses are getting IRS scrutiny for supplying workers with no-cost food, which 'can't be just disguised wages.'

By Bruce Kennedy Apr 15, 2013 9:50AM

Two women sharing a meal at a diner © Cultura Limited, SuperstockIs sitting down with your colleagues for a work-funded meal a chance to brainstorm and collaborate -- or a fringe benefit that should be taxed?

That's an issue The Wall Street Journal recently reported on as the IRS looks at some companies, particularly in high tech, that regularly provide free food to their employees.

As an example, the WSJ points to Google (GOOG). The search engine giant has more than 120 free-for-employee cafes at its facilities around the world serving over 50,000 meals daily. Google's website notes its offices and cafes "are designed to encourage interactions between Googlers within and across teams, and to spark conversation about work as well as play."

Facebook (FB), Yahoo (YHOO), Twitter and other tech companies offer free meals at their offices, and many workers consider the food a reasonable trade-off for their 24/7, high-pressure jobs. But some tax experts believe those meals should be treated as taxable income.

If the IRS is "in there auditing, and you're not taxing the meals, they're going to challenge you on it," employment-tax attorney Thomas Cryan Jr. told The Journal. "I have worked on audits for large tech companies in Silicon Valley on this exact issue."

Cryan says employers caught in that situation usually settle with the feds and come up with a fair-market value for the free meals. Those costs are then passed on to the employees, but with extra pay included in their checks to cover the larger tax bills.

Part of this issue is how a company structures its work culture and whether companies that offer their workers free food have an unfair advantage over rival organizations.

"You can provide free meals to employees for the convenience of the employer," William Weissman, a partner at the Walnut Creek, Calif., branch of Littler Mendelson PC, told the Silicon Valley Business Journal. "The question is what that really means and are all Valley companies providing meals just for that purpose? Food can't just be disguised wages."

While hundreds of millions of dollars could be at stake, some observers wonder if an IRS crackdown on free food is worth the potential cost it might have on the Silicon Valley's successful business model.

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