04 Feb Tax-Free Supper Money Tax Tips
The supper money fringe benefit provides the employee with meal money and gives the employer a tax deduction that is not reduced by the 50 percent rule that applies to most meals.(1)
Example. Your employee works overtime to complete the task that you assigned. You give the employee $45 for dinner. You, the employer, deduct the $45 without reducing it by the 50 percent rules that applies to meals. The $45 is tax-free to the employee.
What if the owner’s spouse is the employee? What if you are the employee of your corporation? Unlike the overtime taxi fare fringe benefit, which is prohibited to control employees (such as owners and their spouses)(2), there is no supper money prohibition on the corporate owner or the proprietor’s spouse.
The regulations allow supper money as an excludable fringe benefit when the benefit is reasonable and satisfies the following three conditions.(3)
- It’s occasional.
- It enables an extension of the workday to include overtime.
- It enables the employee to work overtime.
If the payment of supper money does not meet the three rules, it is taxable compensation to the employee and subject to withholding and payroll taxes.
The Term “Occasional”
The IRS spent time putting together an audit guide for its industry specialists on the meal allowance.(4)
Here are some key points made by the IRS:
- Examine the validity of the term “occasional” on a case-by-case basis, taking into consideration the availability, regularity, and routine with which the benefit is provided.
- Meal allowances defined in union contracts and company policy manuals may indicate a more-than-occasional benefit.
- Discretionary meal allowances may indicate an occasional benefit.
The definition leaves much to be desired. The regulation provides that “occasional” means “not routine and not regular.” That’s the best definition I have, until someone takes the “occasional supper money meal” regulation to court for a better definition.
For example, would a project overtime period of two weeks during a year be occasional? It’s difficult to imagine that this would not be occasional.
Knowing That the Workday Will Include Overtime
This is straightforward. The regulations state that the employer may pay supper money when overtime work necessitates an extension of the employee’s normal work schedule.(5) The regulations then go on to state that this is true even when the overtime work is reasonably foreseeable.(6)
Meal Money Enables the Employee to Work Overtime
The regulations require that the employer provide the supper or other meal money to enable the employee to work overtime.(7)
The IRS says that the employer satisfies this condition with meals provided on the employer’s premises or meals consumed with meal money during the period that the employee works overtime.(8)
Observation. In reality, many employees likely would take the meal money and have dinner with their spouses or friends after completing the overtime.
In these cases, the meal money helps offset the inconvenience of trying to keep a meal warm in the oven at home. The extra money makes the restaurant a viable alternative. It’s hard to imagine that such an arrangement would not meet the meal allowance rules, even though the regulations don’t embrace this idea.
Regulations further state that under no circumstances does meal money calculated on the number of hours worked constitute a tax-free fringe benefit.(9)
- IRC Section 274(n)(2)(B).
- Reg. Section 1.132-6(d)(2)(iii).
- Reg. Section 1.132-6(d)(2)(i).
- Coordinated Issue Alt Industries Meal Allowances (effective April 14, 1994).
- Reg. Section 1.132-6(d)(2)(i)(B).
- Reg. Section 1.132-6(d)(2)(i)(C).