Everybody needs to eat everyday, including employees while at work. Employers and employees can both reap substantial tax benefits when the employer provides or pays for employee meals. The employer gets to deduct the cost of the meals as a business expense and the employees get a tax-free fringe benefit: free food. However, there are detailed rules about what meal expenses qualify for this favored tax treatment.
Employee Meals Can Be a Tax Free Fringe Benefit
Just about anything employers give their employees as "compensation" for their work is taxable income for the employee and a deductible business expense for the employer. Wages or salary, of course, are included as income, but so are many employee fringe benefits such as personal use of a company car, gym memberships, and group term life insurance over $50,000. Ordinarily, the value of meals employers provide their employees would be treated as taxable income to them as well, except for “de minimis” meals (see below).
However, there is a big exception. Employer-provided meals are tax-free to the employee and 100% deductible by the employer if they are provided:
- on the employer’s business premises, and
- for the convenience of the employer.
If more than half of your employees to whom you furnish meals satisfy these requirements, you can treat all meals you furnish to employees on your business premises as furnished for your convenience.
On the Employer’s Business Premises
The employer’s business premises generally means the location where employees work. It can also mean an eating facility that an employer runs, like a cafeteria or lunch hall. Such an "employer-operated eating facility" must:
- be owned or leased by your business
- be operated by you directly by your own workers, or by a third party under a contract, such as a caterer
- be on or near your business premises, and
- provide food and drinks during, or immediately before or after, the workday.
For the Convenience of the Employer
The convenience of the employer test is satisfied if you furnish the meals to your employees for a substantial business reason other than providing them with additional compensation. Examples of such a “substantial business reason” include the following.
Employees Must be Available for Emergency Calls
Making sure workers are available for emergency calls during a meal break is a substantial business reason for providing them with meals.
Example: Hospital employees are on call 24 hours a day to provide medical treatment. The hospital requires them to take meals at the hospital free of charge. The meals are provided by the employer for the employer's convenience because it's necessary for the employees to be present for emergencies and ongoing treatment of patients.
Short Meal Breaks
An employer also has a substantial business reason to provide free meals if the nature of the business makes it necessary to limit meal periods to short time periods, such as 30-45 minutes, and workers can't eat somewhere else in such a short time.
Example: A bank provides its tellers with meals to limit the teller's lunch period to 30 minutes, since the bank is busiest during the normal lunch period. If the tellers had to get lunch elsewhere, it would take much longer than 30 minutes, and the bank strictly enforces the 30 minute limit.
Proper Meals Not Otherwise Available
The convenience of the employer test is also satisfied if employees can't otherwise eat proper meals within a reasonable period of time—for example, because there aren't many restaurants near the employer’s business location.
De Minimis Meals
You can take a deduction for any meal you provide to an employee if it has so little value that accounting for it would be unreasonable or impracticable. Examples of de minimis meals include:
- coffee, doughnuts, or soft drinks
- occasional meals or meal money that enable an employee to work overtime, or
- occasional parties or picnics for employees and their guests.
Meals you furnish to promote goodwill, boost morale, or attract prospective employees aren't considered furnished for your convenience; but they are nevertheless tax-free for the employee if they are de minimis.
Some Special Cases
There are a number of instances where the deduction does and doesn't apply. For example, ordinarily, employee meals must be furnished during working hours. However, so long as the convenience and business premises tests are satisfied, meals furnished after working hours are tax-free if they were eaten after business hours because the employees’ work duties got in the way. On the other hand, if you provide meals to an employee on her days off work, you can't deduct the value of the meals and the value must be included in her gross income. This rule doesn't apply, though, if the meals are furnished with lodging that qualifies for the same tax treatment as qualified employer-paid meals.
Also, if you own a restaurant, the deduction applies if you give your workers meals during, or immediately before or after, their working hours. For example, if a waiter works through the breakfast and lunch periods, you can exclude from his or her wages the value of the breakfast and lunch you furnish in your restaurant for each day worked.