When Is Employee Housing Taxable to the Employee?
Some businesses pay housing expenses (the IRS calls them lodging expenses) for employees. Are these payments a taxable benefit to the employee? As usual, with the IRS, it depends. We'll look at employee housing benefits, both temporary and permanent, in the U.S. and overseas, to determine when these benefits are taxable.
Employee Housing: Deductible to Your Business?
If you pay for housing for employees, this expense is usually considered to be tax deductible to you as an employer as a business expense. That is, you can include these costs on your business tax return if you can show they are directly related.
Employee Housing: Taxable to Your Employees?
Employee benefits are almost always taxable to the employee because they are a part of the employee's income. For some benefits, though, there are some ways that the benefit can be non-taxable (the IRS calls them "excluded").
Employee housing benefits can be excluded if these three conditions are met (all of them):
- The housing is provided on the employer's business premises. For a household worker, your home would be the work premises.
- The housing is provided for the convenience of the employer. You must have a "substantial business reason" for giving the housing, not just as a way to give the employee additional pay.
- The employee must accept the housing as a condition of employment. A condition of employment, also called the terms of employment, is something the employee and employer agree to at the beginning of employment. Both parties agree to abide by these terms. In this case, you must require the employees to live on the business property so they can "properly perform their duties." This condition might relate to an employee who must be on the premises at all times, or when your property is in a remote location.
Some examples of housing that meets the criteria and are not taxable to the employee:
- Fishing employees who live on a boat provided by the company
- A construction employee who works at a remote location that has no other housing available
- A live-in nanny who must care for children at all hours
An example of housing that is taxable is if you give an employee a place to stay or offer a housing allowance because they have a long commute. That's not a condition of employment. The condition of employment requirement means the employee can't do his or her job without staying on your property.
Housing and Meals
If meals aren't available to employees who live on your property, meals for employees that are furnished on your business property and are for your convenience are also excluded from taxes. It makes sense that if you offer housing on this basis, you will have to give the employee meals too.
Restrictions on Housing Benefits
In addition to the three criteria above, there are some other reasons your payments for employee housing might be taxable to employees.
- Employee housing can't be included in a cafeteria benefits plan for employees.
- If you pay employees a housing allowance or allow the employee to take extra pay instead of providing them housing, it's considered taxable, even if on-premises housing is one of the options.
- Housing as part of an education benefit is considered taxable to the employee.
Employee Housing Overseas
The same requirements must be met for employees working overseas. The value of the employee's housing must be (a) at your business location, (b) for the convenience of your company, and (c) the employee must accept the housing as a condition of employment.
Meeting the Qualifications
The IRS considers each of these situations on a case-by-case basis. In each case, the three factors are reviewed and the IRS rules that the housing benefit is or is not taxable to the employee.
How to Show the Value of an Employee's Housing Benefit
If the housing benefit doesn't meet the criteria above, then it must be included in the employee's income for tax reporting. You will need to include this value on the employee's annual W-2 form in Box 1. Use the fair market value of the cost to determine the amount.
Any amounts the employee pays for rent or the housing cost is deducted from the W-2 amount. This benefit is subject to income taxes and FICA (Social Security and Medicare) taxes and it must be included on the W-2 in Box 3 (Social Security Wages) and Box 5 (Medicare Wages). If you don't include an amount for this benefit on the employee's paycheck, be sure to let the employee know the value, so he or she can plan for this additional tax at tax time.
For More Information
The IRS discusses employee lodging in several publications, including, Publication 15-B: Employer's Tax Guide to Fringe Benefits and Publication 525: Taxable and Nontaxable Income.