In Silicon Valley, the employee perks are the stuff of legend. Parents-to-be at Facebook are given a bonus to help with expenses and extensive maternity and paternity leave. Software company Evernote will pay to have their employees’ apartments cleaned twice every month. And Google — perhaps the most generous when it comes to fringe benefits — lavishes its employees with free concierge service and a cafeteria chock full of gourmet food. While these benefits are partially a product of the intense competition for qualified tech workers, they may also be a way for companies to simply increase compensation without giving the tax man a cut. And according to an article in yesterday’s Wall Street Journal, the IRS is taking notice:
There is growing controversy among tax experts about how to treat these coveted freebies. The Internal Revenue Service also has been focusing on the topic, according to attorneys who practice in the area, examining whether the free food is a fringe benefit on which employees should pay additional tax.
The Journal report describes the conundrum the IRS faces when deciding how hard it should try to collect taxes on these fringe benefits. On the one hand, it’s not fair for cash compensation to be taxed while perks like free food aren’t. At the same time, taxing fringe benefits isn’t as simple as taxing cash compensation, and the law allows for exceptions, like when workers are stationed in remote locations where purchasing lunch isn’t feasible.
It makes sense that the IRS would be looking into these practices at this time, as fringe benefits are a growing component of employee compensation overall. According to a recent USA Today study, employee-paid benefits now account for 19.7% of total compensation, up from 16.6% in 2000 and less than 10% in the 1960s. One key driver of this phenomenon is the rising cost of health care. As health care costs have risen, many workers have received a larger percentage of their compensation as health care benefits.
But there has been a cultural shift as well — at least in the technology sector — which is encouraging firms to increase workplace perks. In October the New York Times ran an article on the perks increasingly offered by Silicon Valley, which argued that firms are doling out more and more fringe perks so that employees can spend more time thinking about work and less about nonwork responsibilities. The idea is that if your employer pays for your home to be cleaned or takes care of your child-care needs, you’ll come across fewer of the “work-life balance” problems that plague corporate America today. The goal is to achieve less “work-life balance” and more “work-life integration.” “‘Life-work balance’ is a nonsense term,” Andrew Sinkov, 31, a vice president of marketing at Evernote, told the Times. “The idea that I have to segment work and life is based on some archaic lunar-calendar thing.”
So it may be that the increasing value of benefits paid to employees really is just a way for employers to get more out of their workers than a way to avoid paying tax. But the IRS isn’t going to just forgo this lost revenue. According to the Journal report, the feds are considering cracking down on companies that are giving out fringe benefits without withholding taxes. The result would be firms having to increasingly list benefits on workers’ W2s and higher tax bills for employees at the end of the year.
Of course, if the IRS does really start to crack down hard on this sort of practice, one could imagine many employees bristling at paying taxes on noncash benefits. The Journal report says when this has happened in the past, employers have ensured their employees “don’t lose out by giving them extra pay to cover their larger tax bills.”
But this surely isn’t a solution to the problem on a large scale because it’s just an inefficient use of funds from the employers’ perspective. Essentially these firms are paying employees’ income tax for them, just to ensure that those employees eat lunch in the company cafeteria or take advantage of free child care. For some companies that really want their workers to be on campus for long hours each day, this strategy may make sense. But in the face of a widespread effort by the government to collect taxes on noncase compensation, it will be much easier for firms to just offer their workers higher salaries and fewer benefits.