Here’s today’s statement of the blazingly obvious – the taxman has his finger in every pie. I just saw a news report in The Wall Street Journal that the US Internal Revenue Service (IRS) is looking at taxing the free lunches that many companies – especially Silicon Valley tech firms – are famous for giving to their employees.
According to the article:
“The IRS, arguing that these freebies are a taxable fringe benefit, has given new attention to the issue in recent months during routine audits of some companies, tax lawyers said. When employers haven't been withholding taxes related to the meals, the IRS increasingly has sought back taxes that can amount to 30% of the meals' fair-market value, the lawyers said.
“In another sign of a new focus on the issue, the IRS and U.S. Treasury Department last week included taxation of ‘employer-provided meals’ in their annual list of top tax priorities for the fiscal year ending next June.”
Can anyone honestly say they’re surprised by this move? Free food is an employee perk that keeps more money in employees’ pockets and less circulating in the free market where it would be taxed. So what are the likely outcomes of this move? I see at least three:
- Companies fight the taxman – It’s a worthy battle, and one worth fighting. From the article, there is legal ground to stand on, so why not give it a go? Long term success? Questionable – the taxman usually wins in the end.
- Companies pay the tax – Just paying the tax is certainly an option. Like any other investment in employee well-being and productivity, this one can have value to the bottom line.
- Companies drop the free food benefit – Some companies will also decide it’s just not worth the investment. So the free food goes away (and employees likely resent the change).
While these potential outcomes are interesting to consider, it’s far more useful to think about why a company would make one decision over another. I think how companies perceive the benefit itself will weight most heavily in the ultimate decision on what to do about free-food offerings. If you think of the cafeterias as merely a “perk” designed to increase your corporate reputation as a “cool company,” then your motivation is coming from the wrong place. In organizations that think this way, I can almost guarantee the free food programs will end with taxation.
However, if you think of fully loaded, free-food employee cafeterias as a business decision, then I’d be willing to wager the programs will continue even in the face of 30% increased taxes (which are paid by the company, not the employee, in most cases). Many companies perceive this benefit (as well as free on-site dry cleaning, day care, and many more) as a terrific way to keep employees on campus, focused and working hard for longer hours at a stretch. It is a business decision that directly impacts productivity and potentially profitability.
The impact of how you think about employee benefits stretches beyond these types of perks. Think about your employee recognition and reward program. Nearly 99% of our clients “gross-up” reward value, assuming the tax burden so employees don’t have to. Why? Because offering social recognition with associated rewards that lengthen the memorability of recognition can have significant impact to the bottom line. It’s a strategic business decision. Not a nice-to-have perk.
How are various employee benefit programs thought of in your company? Which do you see having the most strategic impact in your organization?
As Globoforce’s Head of Strategic Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. His articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin, Montreal and Boston. Follow Derek on Twitter at @DerekIrvine.