Tax Rules For Free Meals and/or Lodging to Employees

If you’re wondering about tax-free treatment for employer-provided meals and lodging, you may find the following overview helpful.

Under Section 119 of the Internal Revenue Code, businesses can offer employees tax-free meals and/or lodging, provided they meet certain conditions. Tax-free means that such benefits are not subject to federal income tax for the employee, nor are federal payroll taxes withheld or owed by the employer.

For your business, this translates into the ability to deduct 50 percent of the costs associated with providing free meals and the total cost of providing lodging (see the handy chart in our Overview of 2023 Business Meals and Entertainment).

Conditions for Tax-Free Treatment

Your business’s eligibility for tax-free treatment under these provisions is contingent upon meeting specific criteria.

Business Premises Test

You must provide the meals and lodging on your business premises. This could range from a company break room for meals to on-site lodging for employees required to be available on-premises.

Convenience of the Employer Test

The primary reason for providing the meals or lodging must be for the convenience of your business (the employer), not as a substitute for compensation.

Condition of Employment Test (for Lodging)

For lodging to be tax-free to the employee,

  • the lodging must be on your business premises,
  • employees must accept this lodging as a condition of their employment, and
  • you must demonstrate that the lodging is necessary for them to perform their duties.

Documentation and Compliance

Make sure your business has detailed documentation that proves the necessity, implementation, and enforcement of your business meal and lodging policies.

Limitations and Tax Implications

It’s worth noting that not all scenarios will meet the stringent requirements set forth for tax-free treatment. When the provided meals or lodging do not qualify as tax-free, they are considered additional taxable compensation to the employee, reportable on the employee’s W-2 and subject to payroll taxes.

Furthermore, tax-free treatment does not extend to partners in a partnership or more than 2 percent shareholder-employees in an S corporation.

Planning Ahead

The 50 percent employer deduction for tax-free employee meals is zero in 2026 and beyond, but the meals continue as tax-free for employees.

If you would like to discuss these or any other tax strategies, don’t hesitate to get in touch with us today!

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