Are services provided to Google employees taxed as income or in any way?

Question

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.

Answer 1

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

Answer 2

(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 having a daycare 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 not 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).

Answer 3

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.

Answer 4

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.

Answer 5

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.

Answer 6

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

Answer 7

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.

Answer 8

(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