When is Employee Housing Taxable to the Employee?
Some businesses pay housing expenses—the IRS calls them lodging expenses—for employees. Depending on the circumstances, certain housing and subsistence benefits can be taxable to the employee, and sometimes these benefits can be a deductible business expense for your company.
Several kinds of housing arrangements for employees include:
- Employer paying for the housing of employee's choice, often using a housing allowance
- Employer-provided housing for employees at a specific location
- Temporary lodging for employees while they travel on company business
Lodging Expenses Deductible for the Employer
If you pay for lodging for employees under any of the arrangements above, this expense is considered to be deductible as a business expense. That is, you can include these costs on your business tax return if you can show they are ordinary and necessary business expenses.
Taxable to the Employee
Employee benefits are taxable to the employee because they are a part of the employee's income. Employee housing benefits can be non-taxable to employees if all three of these conditions are met:
- The housing is provided on the property owned by the business or employer
- The housing is provided for the convenience of the employer. The employer must have a "substantial business reason" for this, such as a remote work location.
- The employee must accept housing as a condition of employment. A condition of employment is an agreement at the beginning of employment by both employer and employee.
Some examples of housing that meets the criteria and are not taxable to the employee include:
- 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
Giving an employee a place to stay or offering a housing allowance because they have a long commute does not meet the definition of a condition of employment. The condition of employment requirement means the employee can't perform the job without staying on your property.
Meals for employees that are provided on your business property for the convenience of employment are excluded from employee taxes.
Restrictions on Housing Benefits
In addition to the three criteria above, there are other reasons your payments for employee housing might be taxable to employees.
- Employee housing can't be included in a cafeteria benefits plan. These are separate benefits and they must be taxed separately
- If you pay employees a housing allowance or allow the employee to take extra pay instead of providing them housing, it's taxable to the employee, 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 employee's housing must meet all three requirements to be taxable:
- Housing must be at your business location
- Housing must be for the convenience of your company
- The employee must accept the housing as a condition of employment
Reporting When Housing Is Taxable
If the housing benefit is not an employer responsibility, 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 are deducted from the W-2 amount. This benefit is subject to income taxes and Federal Insurance Contributions Act (FICA) 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, ensure the employee knows, so they can plan for this additional tax at tax time.
Unreimbursed Employee Housing No Longer Deductible to Employees
Employer-Provided Housing for Employees: Get an Agreement
If you provide housing for employees, on your property or somewhere else, you are in effect creating a landlord-tenant relationship, and you should have a signed agreement with each employee.
Landlord-tenant law is regulated by states. An attorney should help you work out the details so that you comply with your state's laws.