IRS Plans To Tax Free Meals Silicon Valley Companies Dole Out

Silicon Valley companies are known to cater to their hard working employees. Free yoga classes, nap rooms and meals are among the perks their workers enjoy.

A recent Wall Street Journal report reveals that the Internal Revenue Service could be targeting these fringe benefits, more specifically "employer-provided meals" in the next fiscal year. In the agency’s recently released Priority Guidance Plan for 2014 to 2015, the IRS states that the free meals will now be considered a taxable fringe benefit, the same way a company car or phone is.

Rather than taxing employees themselves -- an arduous if not impossible task to monitor -- the IRS said it would collect taxes from employers providing the free meals. According to the Wall Street Journal, if the measure is put into effect, a free meal at Google estimated at $8 to $10 for an employee that eats two meals a day at the office could cost the company an extra $4,000 to $5,000 a year in taxes. Software engineers at Silicon Valley companies like Google typically make a base salary of at least $128,000.

These perks on top of the generous salaries are now a fundamental part of Silicon Valley company culture, and expected by incoming employees. But they are not exclusively in the service of employee luxury: They encourage shorter breaks, longer hours spent at the office -- which may mean less opportunity for employees to spill company secrets off campus as well.

At the moment, the tax code views free meals provided by employers in two ways: If meals are treated as a regular payment for labor, they are taxable. If they are a necessary expense for an employee to do their job (like meals given to oil rig workers in the Gulf of Mexico) they are not taxable.

According to a post from the Tax Foundation, the IRS and the U.S. Treasury Department concluded that regularly provided free meals falls under the former category and therefore should be taxed. A “new guidance” on the enforcement will be issued, the agencies told the Journal, although there was no timeline on when that would be.

For bigger tech companies like Facebook, Twitter, Google and Apple, the added food tax may not be hard to cover. But for smaller startups, the new enforcement could be seen as a disadvantage in a space where they feel compelled to provide benefits like free personal training sessions, laundry and unlimited vacation days to attract new recruits.

Matt MacInnis, CEO of the digital publishing startup Inkling, told Forbes he would have to increase employee’s annual salaries by more than $5,000 to cover the added food taxes.

For the past four years, he has provided free lunches to his employees.

“It seems there would be pretty terrible, unintended consequences,” MacInnis said referring to the extra compensation he would consider doling out to his employees if the tax comes into effect.

Critics that spoke to Moneywatch argue companies should be taxed for free meals since it gives some employers an unfair advantage in the recruiting process. They could be considered unfair to taxpayers who are left footing the food bill for these major tech firms if they are left untaxed.

What’s next?

In The Capital’s Tess VandenDolder predicts a legal battle might ensue between Silicon Valley companies and the government. “If these Silicon Valley companies lose their fight, I think it's likely you'll see them adding some extra cushion into their already high salaries in order to cover this added perk,” she says.