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The particular service I want to look at is food (though I think the same ideas should apply to all services). So Let's say that a Google employee spends a dollar on food, purchasing groceries. They got that dollar through working for Google, and their income is taxed, so lets say getting that dollar required $1.3 in income. But if Google bought the groceries for them (I'm aware this isn't how Google's food is provided), it would require only $1 in expenditure from the company. The missing $0.3 in income tax would simply disappear. I believe this is how healthcare for employees works as well.

  1. Is this right?

  2. If it is, why is it that extensive services are provided by high margin companies competing for talent, rather then lower margin businesses looking to boost their profits by reducing their expenditures on employees (by cutting out the government)?

For example, suppose John Doe makes $100,000 a year taxed at a rate of 20%, for a take home pay of $80,000. He spends $10,000 on food. His employer Corporation decides to give him all of his food and deduct it as a business expense - costing them $10,000. But now they can pay John Doe an amount so his take home pay will be reduced by $10,000 - $87,500 The company is now spending $97500 employing John Doe, for a savings of $2500$.

The lower the margins of the business and the more (in percentage of fixed costs) the company spends on employees, the greater the increase in profits these savings enable.

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    If John Doe accepts a $12,500 paycut in exchange for $10,000 in food, he's not a very good negotiator. – aroth Jun 12 '17 at 8:17
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    AW, it's worth noting that in the "old days" (in the US), precisely, exactly, and specifically what you say happened: the perfect example was a company car. a car is a real expense, that you can really compare to having to pay for it yourself, with after-tax dollars. in short, companies used to be able to throw people a car and the "tax dodge" you outline would, precisely, happen. (Obviously the feds got on to this and stopped it, and that's the reason so many people leave the US for more civilized countries like Sweden where effectively you can still "get away" with that!) – Fattie Jun 12 '17 at 14:48
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    @Fattie - what do you mean there's no savings to the family if the employer gives free food? My employer offers free food, and instead of spending ~$9 - $15/day on lunches, I'm spending $0. Even if I'd normally pack a lunch, by eating a free lunch at the office I wouldn't have to buy the food that goes into the packed lunch, so again, a cost savings. – Johnny Jun 12 '17 at 23:24
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    @Fattie, I really don't get how you can say that free food is not a money savings – Bart Jun 12 '17 at 23:38
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    @Fattie - ""so many people leave the US for more civilized countries like Sweden " - please provide statistics that show that a meaningful amount of people left US for Sweden (I'll leave aside the rude and offensive implication that somehow US isn't civilized). – user2932 Jun 13 '17 at 15:08
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Most of this is already regulated. "Food" specifically is exempt from taxes if it's done on premise and for the "convenience of the employer", whatever that means. See https://www.law.cornell.edu/uscode/text/26/119

Other benefits, such as commuter aid (public transport, parking) are tax free up to a certain limit (I think $255 for 2017) and any excess it taxable income.

You can study the whole gory details at https://www.irs.gov/pub/irs-pdf/p15b.pdf

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    Thanks for this factual answer to the question, good one. – Fattie Jun 12 '17 at 14:36
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    "convenience of the employer" may be "so workers don't have to leave to eat, and instead stay around and work more". Like, brining food to a worksite. – Yakk Jun 12 '17 at 17:25
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(1). Is this right?

Pretty much, though this is a really rudimentary way to think about it.

(2). If it is, why is it that extensive services are provided by high margin companies competing for talent, rather then lower margin businesses looking to boost their profits by reducing their expenditures on employees (by cutting out the government)?

It's the polar opposite of that.

Google (and companies like that) do things like have a day care center on premises. The company staffs a day care center which has costs, then lets employees use it for free. This is a business expense for Google, and in relative terms, a considerably large business expense that a lower margin business could no afford.

Employer healthcare is a tax protected expense for employees via section 125 of the tax code. The company portion of the healthcare costs are a deductible business expense to the company, as expected. Healthcare is different than most other expenses because the employee can forego income before it's effectively received which negates it from taxable income.

This doesn't work for something like food purchased at a cafe on a Google complex. If employee money is being spent at a corporate cafe, it's taxable income being spent (though the cost of running the cafe is a tax deductible business expense to the company).

There have been discussions in congress to assess a value as income to employees for services like on site child care and no cost employee cafeterias.

To address your new example:

For example, suppose John Doe makes $100,000 a year taxed at a rate of 20%, for a take home pay of $80,000. He spends $10,000 on food. His employer Corporation decides to give him all of his food and deduct it as a business expense - costing them $10,000. But now they can pay John Doe an amount so his take home pay will be reduced by $10,000 - $87,500 The company is now spending $97500 employing John Doe, for a savings of $2500$.

This would be an audit prone administrative nightmare. Either

  • You need John to submit receipts for reimbursement up to the $10,000 agreed upon amount which would require some kind of administrative staff, or

  • After a very short period of time John forgets the abstract value of the food cost arrangement, that is only really benefiting the employer in the form of lower payroll expense, and is enticed away for more pay somewhere else anyway. The company may be saving $2,500, though again there will be an additional administrative expense of some sort, but John is only saving $500 ($97,500 * 0.20 - $100,000 * 0.20).

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    "Fringe benefits like cafeterias exist to ... keep your salaried employees on site working longer." This works. I continued working at the same company for years after my "market value" far exceeded what I was actually being paid by them; all simply because the fringe benefits and company culture made it comfortable to stay. – CactusCake Jun 12 '17 at 14:02
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    "food purchased at a cafe on a Google complex" many, many tech employees get totally free food. not merely cheap/subsidized cafes. – Fattie Jun 12 '17 at 14:38
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    @Fattie, is that the explanation for your alias? – CactusCake Jun 12 '17 at 15:02
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    LOL @CactusCake hilarious man :) – Fattie Jun 12 '17 at 15:35
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    @A.W.Grossbard you also have to consider that really cheap companies may not be able to reduce the wage they pay their employees (because they already pay the minimum), and their employees often pay no income taxes (because they make so little money). People who are poor, especially if they receive food stamps, also tend to value cash more highly than an equal amount of food. That's probably doubly true if they can only feed themselves and not their kids with it. – Kat Jun 12 '17 at 21:04
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In many countries, giving something free to the employee is considered a taxable income equivalent, and taxes have to be paid on it. As it cannot be assigned to specific employees, the company pays a flat tax on it, so it actually costs the company more.

Also, not all employees value it equally, or consider it as a part of their income, so reducing the salary accordingly would not be considered ok by many employees. As a result, the company can only do it as an additional offer, which is too expensive for small businesses.

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    In the British Isles this is called "benefit in kind", and is indeed subject to taxation as if it was regular income. – jcaron Jun 13 '17 at 9:54
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Is this right?

The example is slightly off. Google would be running a cafeteria that can be subsidized. Employees pay an amount to buy food. Not every one spends the same amount or eats the same amount of food. If someone doesn't use cafeteria; he doesn't get more money.

For example, suppose John Doe makes $100,000 a year taxed at a rate of 20%, for a take home pay of $80,000. He spends $10,000 on food. His employer Corporation decides to give him all of his food and deduct it as a business expense - costing them $10,000. But now they can pay John Doe an amount so his take home pay will be reduced by $10,000 - $87,500 The company is now spending $97500 employing John Doe, for a savings of $2500$.

If a scheme is devised specifically to evade taxes; then it is invalid. In this case Bill may buy groceries worth only $5000. So keep track of which employee buys how much groceries in added cost of Google. Plus one can't really call it a business expense.

  • A subsidized cafeteria can qualify as business expense as it is not directly for a single employee. Plus there are no eating joints near by and it is the responsibility of the employer to provide adequate catering services.
  • Compare this with groceries, different for different individuals, something they can buy themselves.
  • Like wise someone may buy a TV or washing machine etc and claim it as expense on company
  • In certain industries an organization can argue that a Cellphone / laptop is essential for an employee to work and hence provide for it.
  • You are taking my example too literally. Corporation would not actually keep track of how much it needed to give each employee, it would simply provide a service with average cost across the employees. "If a scheme is devised specifically to evade taxes; then it is invalid" - no, it is invalid if it is illegal. Google did tons of stuff in Europe to evade taxes, pretty blatantly(and most of it was legal). – Retired account Jun 12 '17 at 5:13
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    "If a scheme is devised specifically to evade taxes; then it is invalid" But that's not what's happening here. His employer providing him food as a perk changes the economic reality -- specifically who pays for the food. That has tax consequences as specified by law. There is nothing wrong with deciding the economic reality of who buys the food based on which way is superior for tax reasons. You're doing the equivalent of arguing that if I buy fewer cigarettes because the taxes on cigarettes are high I'm breaking the law. – David Schwartz Jun 12 '17 at 7:34
  • Have a private grocer & cafetaria on location. Give each employee a ration card they can use to claim a share of this food. Now we are in a fuzzy middle. – Yakk Jun 12 '17 at 17:27
  • @A.W.Grossbard Tax evasion is illegal by definition; you may be confusing it with tax avoidance. – David Richerby Jun 12 '17 at 22:05
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    @David It is not the terminology that matters but the action. Doing something because it reduces your tax bill-even if you do it specifically to reduce your tax bill- does not make it the criminal act of tax evasion. That was what I was getting at, and I decided not to nitpick on terminology. – Aperson123 Jun 12 '17 at 22:16
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Others have pointed out that many benefits offered by employers "for free" are actually taxed; the employee must pay taxes on the value of what they're receiving (usually services of some kind). This is called imputed income.

Also pointed out was that healthcare is an exception; a specifically protected class of benefits that aren't taxed. But sometimes they are.

Many companies now offer domestic partner health coverage as well, regardless of whether the couple is in any kind of civil union or other arrangement. The costs to the employee vary, but it's often that they simply pay double of what their individual coverage contribution would be. Independent of the employee's direct contribution for their domestic partner, they must also pay taxes on the value of the employer's cost of the coverage. This can be significant, as typically the employer is paying the lion's share of the healthcare cost.

  • It would appear that "free food at work" (as indeed very many "tech" employees in fact get - totally, completely free breakfasts, lunches and dinners) -- it would appear that (very surprisingly!) in the USA that is, indeed, totally tax free. It does not (surprisingly!) count as imputed income, you get a pass. Is this quite correct, does anyone know? – Fattie Jun 12 '17 at 14:37
  • I think you are correct, because as others explained, it's not specifically for the benefit of a single employee. But as mentioned these types of things are being looked at by congress. – briantist Jun 12 '17 at 14:38
  • Someone has mentioned daycare (a really, really, expensive benefit). I wonder if that is on the magic list of "hey, you don't have to impute this!" Fascinating QA, it never occurred to me before. – Fattie Jun 12 '17 at 14:41
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    @Fattie it's not really surprising to me. Free food is usually a benefit to the employer more than the employee. It might save you five or ten dollars for lunch, but you're more likely to eat it at your desk and keep working. Even if you just take a fifteen minute shorter lunch, they probably come out ahead. Definitely any place offering free dinner is doing it for practically free overtime. – Kat Jun 12 '17 at 21:42
  • I agree with you totally, "free food" is just a scam tech companies offer to save themselves, the companies money. What I was saying is, it's very surprising that the US Gov. has not taxed it yet, apparently. – Fattie Jun 12 '17 at 21:47
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Companies often provide cafeteria, or catering services, to employees tax-free at subsidized rates. I'll use "cafeteria" as an illustration.

The IRS says that in order to avoid lunch being taxed as income, the employees must pay the "direct costs" of the lunch, food and labor. In addition to those costs, cafeterias add two more items to come up with the total tab; "overhead," (the cost of renting the space), and of course, profit. The company can waive the last two, and charge employees only materials and labor. That's why subsidized cafeteria food can cost as little as half of what it would cost elsewhere.

  • Subsidized cafeteria food can cost nothing, as it does at google. This answer is wrong, at least for the U.S. – Retired account Jun 13 '17 at 4:59
  • @A.W.Grossbard: There maybe special circumstances, such as lack of access from "campus" to alternate lunch locations. The IRS does allow certain exceptions for the "convenience of the employer" (not the employee). I don't know the details, but they are applicable on a case-by-case basis. I was quoting the "general" rule. – Tom Au Jun 13 '17 at 5:02
  • They are not applicable on a "case by case basis" if everyone uses them. But I get what you're saying - buying groceries would not be "for the convenience of the employer" and would therefore be taxable as income. But based on what you are saying, they could provide subsidized groceries. I suppose this is also why REI employee discounts are not taxable. Anyway, thank you for your answer. – Retired account Jun 13 '17 at 5:18
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These services and other employee perks are referred to as fringe benefits.

An employee "fringe benefit" is a form of pay other than money for the performance of services by employees. Any fringe benefit provided to an employee is taxable income for that person unless the tax law specifically excludes it from taxation.

One example of taxable fringe benefit is award/prize money (to prevent someone from "winning" most of their salary tax-free.)

Cash awards are taxable unless given to charity. Non-cash awards are taxable unless nominal in value or given to charity.

A less intuitive example is clothing.

Clothing given to employees that is suitable for street wear is a taxable fringe benefit.

Your example possibly fits under

  • de minims (low-cost) fringe benefits such as low-value birthday or holiday gifts, event tickets, traditional awards (such as a retirement gift), other special occasion gifts, and coffee and soft drinks

  • working condition fringe benefits--that is, property and services provided to an employee so that the employee can perform his or her job.

Note that "cafeteria plans" in the source don't refer to cafeteria but allow employee choice between benefit options available.

  • cafeteria plans that allow employees to choose among two or more benefits consisting of cash and qualified benefits
  • This is a good answer, but it would not apply do food benefits that cannot be connected to specific employees. It would however, I think, apply to Housing. Would it apply to daycare? – Aperson123 Jun 12 '17 at 23:59
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    Note that a "cafeteria" plan does not refer to food -- it's a plan allowing the employee to select from a "menu" of different benefit offerings, usually related to insurance coverage. – Michael - sqlbot Jun 13 '17 at 16:05
  • @Michael-sqlbot wow, thanks for picking that up! I've updated the answer – o.v. Jun 13 '17 at 22:43
  • @Aperson123 I've updated my answer to focus on "working condition fringe benefits," I don't know specifically about daycare – o.v. Jun 13 '17 at 22:45
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(Regarding one aspect of the question) Here's a survey suggesting new programmers value "free lunch", old programmers do not care about it:

https://stackoverflow.blog/2017/06/12/new-kids-block-understanding-developers-entering-workforce-today/?cb=1

enter image description here

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