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Working overtime? Take advantage of tax-free supper money

Tax law discriminates company owners by giving them zero or fewer fringe benefits. There is a way out of this discrimination when it comes to supper money. So how does it work?
  • The supper money fringe benefit is for defined employees,
  • According to IRS supper money rules, the defined employees receive supper money.
As a sole proprietor, you can avail this benefit. Even if your business operates as a corporation or a partnership, you qualify for this benefit. As a word of caution, though as a boss you meet the qualification of the employee definition, it is recommended to use the supper money for your meals in situations where you provide meal allowance to overtime employees since as a boss you have control over the working hours when compared to your employees.

The Deduction

The supper money fringe benefits give you and your employees tax-free meal money and the employer, a tax deduction of 50 percent of the meal money.

Two Things to Know

The supper money fringe benefit was 100 percent deductible before the Tax Cuts and Jobs Act (TCJA) but was reduced to 50 percent deductible for tax years 2018-2025. Now the question arises what happens in 2026… The answer is TCJA eliminates all tax deductions for supper money. Though the money remains tax-free for the employee, it is not deductible by the business.

Four Rules for Success

The regulations allow supper money as an excludable fringe benefit when it satisfies the below conditions:
  1. You provide the benefit only occasionally.
  2. You pay no more than a reasonable amount.
  3. The meal enables the employee to work overtime.
  4. You DO NOT calculate the benefit based on the number of hours worked.

Consequences of the Violation

In case the supper money payment does not meet the above four rules, then it is a taxable compensation to the employee and subject to withholding and payroll taxes. For the employer, the compensation creates a 100 percent deduction also creating employer payroll taxes.

What does the term ‘occasional’ mean?

According to IRS regulation, occasional means not routine and not regular. Here are a few key guidelines:
  1. If the meal allowance is a contractual right of the employee, then you probably
  2. violate the more-than-occasional rule
  3. Whether an allowance is occasional is determined on a case-by-case basis
  4. It is best if the allowance is at the employer’s discretion rather than formalized in a company policy.

What does the term ‘reasonable’ mean?

There is no upper dollar limit set by the IRS on the meal allowance given to the employees. The only guidance is that it should be a reasonable amount. So, how to define reasonable? For instance, if the restaurants near your office are expensive, then you should give your employees enough meal allowance to meet the food expenses. But remember, there should be justification for the expenses.

Working overtime

According to IRS regulations, the meal allowance must enable you and your employer to work overtime. The IRS regulation also says that you accomplish this if the employees eat the meal during the overtime period.

Suppose the employee eats after work hours, then what happens?

There is no mention of this in the IRS regulations, though it is clear that the meal money should be given to enable overtime work. However, there is no clear indication of what the employee eats after work hours.

Discrimination allowed

There are no discrimination rules applied in this area. The supper money benefit can be offered to any employee, including solely to officers and the highly compensated. The IRS examines on an employee-employee basis. If the meals are provided frequently to any employee, then it is not called occasional and is taxable to that person.

Takeaways

The following rules are to be followed to avail supper money benefit:
  1. The benefit should be provided occasionally.
  2. Only a reasonable amount should be spent.
  3. The meal or allowance enables the employee to work overtime.
  4. The meal benefit is not calculated based on the number of hours the employee works.

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