The vast majority — though certainly not all — of caterers provide employee meals. On occasion, caterers tell me they don’t provide meals because they don’t want to have to contend with reporting them as a taxable benefit. At the same time, caterers providing lunch services to corporations who feed all of their employees is a growing business opportunity, particularly in certain parts of the country.
Before we go any further, please understand you should consult your own professional advisors to understand how IRS rules impact your company.
Employee meal taxation policies impact the catering industry in two different areas. These include the tax impact of caterers providing meals to their own employees, as well as the business opportunities for those caterers in the contract foodservice and corporate delivery markets. There are tax concerns in both of these areas. In particular, the issues with catered meals are the deductibility as a cost of doing business for the employer, and the potential taxable benefit liability for the employee.
There’s no such thing…as a free lunch?
First, let’s look at the treatment for caterers offering free meals to their own employees. In this case, the concern is whether this is a taxable benefit for the employees. Under IRS regulations, meals are non-taxable and completely deductible if they are provided for the convenience of the employer, and on the premises of the business.
The characterization of convenience of the employer is — as is often the case in tax regulations — somewhat ambiguous. The key to this definition is that there must be a substantial non-compensatory business purpose. In other words, free meals cannot be provided strictly in lieu of additional pay.
Several examples of acceptable criteria for making meals available for non-compensatory business purposes are:
1. Meals are made available for the purpose of keeping employees on site and available to deal with emergency calls during the meal period. For caterers that offer lunch delivery services, this certainly seems like a plausible reason to offer this benefit.
2. Other meal options are not available close enough nearby for employees to take advantage of within a reasonable time.
3. Because of the nature of the daily work schedule, employees don’t have time to go out for their meals, whether there are other options available nearby or not. For example, if production staff must get back to their kitchen stations to deal with perishable products, this would seem to pass the test described.
Under the relevant IRS regulation, all meals furnished on the premises of the employer for its employees are treated as being furnished for convenience of the employer, if more than 50 percent of the employees are furnished the meals for reasons such as those noted above. In other words, not all employees have to fit these requirements, but at least half do. Under this 50 percent minimum standard, all of the meals are considered to be for the convenience of the employer and therefore excludable from the employees income. This becomes, for the employee, a tax-free de minimis fringe benefit.
On the premises advantage
The other area of concern relates to the deductibility of catered meals, generally lunches purchased by the caterers’ clients for their own employees. Sometimes these are meals provided for employees on a 100 percent subsidized basis, and are available every day. This model is perhaps most common in the tech industry, but there are other sectors of the economy that also provide lunch at no cost for their employees. In this case, the client is looking for assurance that the cost of these subsidized meals is completely deductible.
Restaurant meals are always only deductible at 50 percent, whereas meals catered at the company’s premises are 100 percent deductible as described in the previous section. This “on the premises” requirement provides a built-in competitive advantage for caterers, at least in comparison to restaurant meals. But since nothing tax related is ever simple, there are some variables that need to be addressed.
For meals to be completely deductible to the employer, they need to pass several tests. Among these are:
Non-discrimination. For example, a company that provides free meals to senior staff, but not to line or hourly staff, would not pass this test and therefore the catered meals would only be 50 percent deductible.
Meals provided as compensation. Under circumstances where meals are a taxable benefit to the employee, they are completely deductible to the employer.
Fringe benefit. Meals that are treated as a tax free de minimis fringe benefit for the employee, under the convenience of the employer test as described above, are 100 percent deductible.
Overall, the current tax code seems to offer caterers an opportunity to feed their own personnel with no tax liability, while at the same time providing a competitive advantage when compared to restaurant meal tax treatment.
Carl Sacks is the director of the Catersource Consulting Unit and executive director of Leading Caterers of America. He can be reached at [email protected].