Q: Perks are tax efficient: paying someone $150k plus $50k in perks is more ‘take-home value’ than straight-up paying them $200k. How should I think about this?
It’s a small factor. I don’t think you should let tax efficiency override a potentially high-value cultural decision. I would usually rather pay more than offer more perks but I can see the tradeoff going other ways in some situations.
Being more explicit about how this interacts with another downside of perks, where some people will take the perk who don’t actually benefit that much from it. A toy example:
You decide to offer free high-quality coffee ($5/serving)
Employee A loves this coffee and gets the full benefit
Employee B isn’t picky, and would be very nearly as happy with cheap coffee ($1/serving)
You’re spending $10 to effectively give $5 to A and $1 to B tax free. The overall tax rate is about 40% (federal + state + payroll; plausible), so this example is a wash. Real examples can go either way, depending on the costs involved and how many A-like vs B-like people you have.
I’d suggest that the relevant tax laws about perks make inefficiencies more likely here. While the topic is complex, optimizing for perks that don’t generate taxable income imposes a constraint on what can be offered. For instance, business-class airfare and company retreats shouldn’t generally trigger taxable income to the employee, but are likely to be worth significantly less than cash to the employee. It’s been over fifteen years since I took tax, but it’s not obvious to me that regularly offering $5/serving coffee would be a de minimis fringe benefit. And as a policy matter, it should be taxable—it’s too close to being disguised compensation.
For the particular example of coffee, that’s my guess at what Google was paying per serving when I worked there (barista etc). Am I wrong in expecting that they would be being pretty careful about this?
They have actual tax lawyers, so no need to amend your returns!
That much of the cost was for a barista, etc. rather than the coffee itself is potentially relevant—both from a tax standpoint and for assessing your argument.
One could pitch the devolution of coffee-producing labor to someone making a tiny fraction of what the average Google employee makes as primarily for the benefit of the employer—it gets the employee back to their desk more quickly. That makes it less likely to be seen as “disguised compensation.” Presumably your hypothetical $1 coffee solution was DIY?
That being said, I do not drink the stuff so could be making some assumptions that are off-base.
One could pitch the devolution of coffee-producing labor to someone making a tiny fraction of what the average Google employee makes as primarily for the benefit of the employer—it gets the employee back to their desk more quickly. That makes it less likely to be seen as “disguised compensation.” Presumably your hypothetical $1 coffee solution was DIY?
In practice people would wait in line for the barista, sometimes for quite a while, and the baristas weren’t much faster than doing it yourself, so the time argument seems to point the other way?
Did a little updating: the tax treatment of employee meals on-site is a bit different than other perks, with some changes since I took tax. They are in some circumstances not tax-deductible as a business expense by the employer or taxable to the employee, so the IRS gets its fill a different way where the employer is not exempt from income taxation. E.g., this discussion of a 2019 IRS technical advice memorandum or TAM (also this). So going back to your hypo, if that is the tax treatment in a particular situation, there may not be a tax advantage depending on whether the employer is a 501(c)(3).
Traditionally, coffee and doughnuts are excludable as de minimis fringe benefits, but as the first linked article explains the reason for that is that the value of each snack event is small and accounting for the benefit is impractical. I’m not sure that would hold for a barista-run coffee shop where the employer could scan the employee’s badge and track usage that way. A study of the 50-page TAM opining on one employer’s on-campus dining might help but doesn’t seem very high-value.
Being more explicit about how this interacts with another downside of perks, where some people will take the perk who don’t actually benefit that much from it. A toy example:
You decide to offer free high-quality coffee ($5/serving)
Employee A loves this coffee and gets the full benefit
Employee B isn’t picky, and would be very nearly as happy with cheap coffee ($1/serving)
You’re spending $10 to effectively give $5 to A and $1 to B tax free. The overall tax rate is about 40% (federal + state + payroll; plausible), so this example is a wash. Real examples can go either way, depending on the costs involved and how many A-like vs B-like people you have.
I’d suggest that the relevant tax laws about perks make inefficiencies more likely here. While the topic is complex, optimizing for perks that don’t generate taxable income imposes a constraint on what can be offered. For instance, business-class airfare and company retreats shouldn’t generally trigger taxable income to the employee, but are likely to be worth significantly less than cash to the employee. It’s been over fifteen years since I took tax, but it’s not obvious to me that regularly offering $5/serving coffee would be a de minimis fringe benefit. And as a policy matter, it should be taxable—it’s too close to being disguised compensation.
For the particular example of coffee, that’s my guess at what Google was paying per serving when I worked there (barista etc). Am I wrong in expecting that they would be being pretty careful about this?
They have actual tax lawyers, so no need to amend your returns!
That much of the cost was for a barista, etc. rather than the coffee itself is potentially relevant—both from a tax standpoint and for assessing your argument.
One could pitch the devolution of coffee-producing labor to someone making a tiny fraction of what the average Google employee makes as primarily for the benefit of the employer—it gets the employee back to their desk more quickly. That makes it less likely to be seen as “disguised compensation.” Presumably your hypothetical $1 coffee solution was DIY?
That being said, I do not drink the stuff so could be making some assumptions that are off-base.
In practice people would wait in line for the barista, sometimes for quite a while, and the baristas weren’t much faster than doing it yourself, so the time argument seems to point the other way?
Sounds like they should have hired more baristas.
Did a little updating: the tax treatment of employee meals on-site is a bit different than other perks, with some changes since I took tax. They are in some circumstances not tax-deductible as a business expense by the employer or taxable to the employee, so the IRS gets its fill a different way where the employer is not exempt from income taxation. E.g., this discussion of a 2019 IRS technical advice memorandum or TAM (also this). So going back to your hypo, if that is the tax treatment in a particular situation, there may not be a tax advantage depending on whether the employer is a 501(c)(3).
Traditionally, coffee and doughnuts are excludable as de minimis fringe benefits, but as the first linked article explains the reason for that is that the value of each snack event is small and accounting for the benefit is impractical. I’m not sure that would hold for a barista-run coffee shop where the employer could scan the employee’s badge and track usage that way. A study of the 50-page TAM opining on one employer’s on-campus dining might help but doesn’t seem very high-value.