Parties, Tax Law

Do You Have To Pay Taxes On Your Holiday Party Drinks?

Ugh. Leave it to tax gurus to introduce uncertainty to your holiday revelry.

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It’s December, which means it’s officially holiday party season! Food, drink, awkward conversations with your boss, waking up next to your (probably married) co-worker. Good times.

So, of course, while you gear up for a night of office-sponsored debauchery, it’s time to consider “should you be paying taxes on that?” Because as any tax lawyer will tell you, most of the free stuff you get is actually income. Like all those people who won free cars from Oprah and got hit with hefty tax bills. It’s just as true for the free stuff you get at work. For every free car ride or phone plan you get, you most likely should be paying taxes on the value of those perks to Uncle Sam.

Ugh. Leave it to tax gurus to introduce uncertainty to your holiday revelry.

First, let’s take a step back and look at your tax liability for employer-provided food and drink generally. Tax lawyer Syd Gernstein recently tackled the phenomenon of companies plying employees with free food and drink and what it means come April 15.

The IRS’s guidance plan suggests that the agency is considering issuing guidance clarifying whether these employers should be including these meals in their employees’ gross incomes, and paying employment taxes (that is, FICA, FUTA and federal income tax withholding) for them. Many taxpayers, not surprisingly, do not think that such benefits are taxable.

….

But the IRS regulations do not support this reading. The regulations require that the employer have a “substantial noncompensatory business reason” for providing the meals, and provides examples illustrating that this means it must not merely be beneficial to the employer to provide such meals, but must in fact be necessary for the employer to provide the meals to enable the employee to perform his or her duties. Examples specified in the regulations of circumstances amounting to “substantial noncompensatory business reasons” include furnishing meals to employees during their working hours to have them available for emergency call during their meal period or because the employees could not otherwise secure “proper” meals within a reasonable meal period.

As they say, there’s no such thing as a free lunch. There are exceptions, of course. For example, the discount offered at a severely discounted office cafeteria would not constitute taxable income if the revenue of the cafeteria exceeds the cost of running the facility.

Which brings us to the office holiday party. While you’re loading up on appetizers and free cocktails, should you fear the IRS coming to call? Mercifully, no.

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But how could this be? After all, as I discussed in an earlier posting, daily or weekly employer-provided meals are taxable (unless they meet a couple of narrow exceptions).

It is because food and drink that you consume at the holiday Christmas party are “de minimis” fringe benefits. That is, the tax Code excludes from employees’ gross income property or services that have a value so small as to make accounting for them “administratively impracticable.” What this in effect means is that if the cost the employer would have to incur to account for each provision of a benefit would exceed the revenue that the government would derive from taxing that benefit, then the provision is not taxable.

So, if your employer is just providing you with a glass of punch and a slice of cake at the annual company Christmas party, go ahead and stock up!

Of course you will be paying for years for making out with that partner’s spouse in the closet, but the IRS has nothing to do with that.

Daily Employer-Provided Meals: As Taxable As They Are Delicious [Federal Tax Blog / Bloomberg BNA]
I’m Afraid to Ask… Is this Slice of Cake Taxable? [Federal Tax Blog / Bloomberg BNA]

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