When Does Employee Appreciation Become Taxable Employee Compensation?

Employee appreciation at Silicon Valley companies could soon change, thanks to recent IRS scrutiny into the widespread and popular perk of free on-site cafeterias.
It was never exactly a free lunch to begin with — a meal always costs someone, somewhere — but stricter enforcement of current laws may require more employers and even employees to pay taxes on the buffet.
The news that free food could be up for taxation as a fringe benefit has everyone scratching their heads, from tax experts to HR executives to employees.
When exactly does employee appreciation become employee compensation? Is free cafeteria food employee compensation or is it a cost of business for these industries? Fringe benefits are a complex area of tax law, and the rules are still being clarified.
Wondering what this could mean for your company? Read on.

What are the current laws regarding meal perks?
Employer-provided meals are taxable as a fringe benefit, up to 30 percent of fair-market value. But there are exceptions, and until now the IRS hasn’t made taxing such perks a priority.
Companies are allowed to give food to employees if it’s “for the convenience of the employer,” but not if it’s simply for the employees’ happiness, according to Suzanne Lucas of Inc., in the article “Free Food Makes Employees Happy, So Naturally the IRS Wants to Tax It.” She breaks down what this means, in practice:

So, if your startup is in the middle of the Yukon Territory and it takes six days on dog sleds to get there, it’s for the employer’s convenience since the employees would take all their time just foraging for food. […] It’s going to be difficult to make that same argument if you’re located in downtown San Francisco, with 14 restaurants on the same block.

What exactly is a “meal”?
Would a bag of bagels or platter of doughnuts at a morning meeting count? The IRS exempts doughnuts but counts bagels, stipulating that a bagel is “more like a meal than a snack,” according to The Washington Post.
In general, however, snacks or the occasional meal at a business meeting doesn’t count as taxable.
Just how much of a perk are the free cafeterias at Silicon Valley companies?
It’s a major perk. If “cafeteria” brings to mind squares of mystery casserole and lunch ladies in hairnets, think again. The cafeterias at Google, Twitter, Facebook and other tech companies are a step up. They offer truly gourmet dining, organic and chef-prepared, unlimited and at no cost.
Between its Manhattan, N.Y. and Mountain View, Calif. locations, Google alone has 35 canteens offering fresh meals — plus hundreds of pantry-like “micro-kitchens” stocked with snacks and beverages.
Bon Appetit, in a feature on Google cafeterias, puts it this way: “Imagine if your office pantry had a professional-grade espresso maker and a popcorn popper instead of a perpetually broken vending machine. Or if the company cafeteria served beer-braised short ribs and roast black rock cod with heirloom-tomato relish instead of soggy turkey sandwiches.”
But aren’t free cafeterias a necessary competitive advantage?
Silicon Valley companies would say yes. They make the case that free on-site cafeterias are vital to attracting and retaining an in-demand and limited talent pool. It also helps employees to work long hours, without the distraction of off-campus meal breaks.
“The market for tech workers is so hot right now that companies use every tactic they can to get the workers they want — not just extra pay,” writes Business Insider’s James Cook.
Does the competitive advantage apply to non-Silicon Valley, non-tech companies?
Free meal perks can matter at just about any company, experts say, and the government’s exemption for “employer convenience” is vague.
“If your employees are able to eat lunch and get back to their desks in 20 or 30 minutes, that’s a big time savings,” Washington, D.C. employee-benefits attorney Mary B. Hevener told the Washington Post. “The food is a lot healthier in many cases. And maybe you don’t want your employees running around in other eateries talking business.”
How is this issue developing?
It’s still up in the air. The IRS and the Treasury intend to focus on free meals as part of their tax priorities for the current tax year, according to James Cook of Business Insider. But no guidance or decision has been announced on taxation of meals. In the meantime, Cook predicts tech companies will join together to lobby to protect untaxed meal perks.
What’s the next step for companies interested in this issue?
Pending clear IRS guidelines, Suzanne Lucas of Inc. advises, “You need to check with your tax attorney on what the consequences could be for your company if you continue to offer free food. Then you’ll need to evaluate if that’s worth it to you and to your employees. Your employees will probably not be thrilled about a cut in their take-home pay, so you’ll probably need to consider ‘grossing up’ their salaries to account for the ‘free’ food that the IRS considers income.”
Taxed or untaxed, and no matter how big or small the investment, employee appreciation builds morale, motivation and a strong company culture.
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