Section 119 Returns: Tax-Free Meals and Lodging

Section 119 of the Internal Revenue Code allows employees to receive meals and lodging from their employer without that value being counted as taxable income. This tax “exclusion” means the fair market value of these benefits is not added to an employee’s wages. The purpose of this provision is to address situations where such benefits are integral to the business’s operation, not just a perk.

This tax-free treatment generally does not apply to partners in a partnership or to shareholder-employees owning more than 2% of an S corporation. The exclusion is not automatic and applies only when specific criteria are met, recognizing that in certain jobs, living or eating at the workplace is a necessity. This ensures employees are not unfairly taxed for benefits they must accept to perform their jobs properly.

Qualifying for the Meals Exclusion

For the value of employer-provided meals to be excluded from an employee’s income, two distinct tests must be met. The first is the “convenience of the employer” test, which requires that the meals be furnished for a “substantial noncompensatory business reason.” This means the purpose for providing the meal is to benefit the employer’s business operations, not simply to provide extra pay to the employee.

An example is a hospital that provides meals to its medical staff in an on-site cafeteria, which allows doctors and nurses to remain available for immediate emergencies. Another qualifying scenario involves a company with a very short lunch break, where providing meals on-site is the only way for employees to eat and return to work on time. Conversely, a company providing free lunches simply to boost morale would likely not meet this test, as it lacks a sufficient business necessity.

The second requirement is the “on the business premises” test, meaning the meals must be physically provided at the employee’s place of work. The “business premises” is generally the location where the employee performs a significant portion of their duties, such as an office building, factory, or remote work site. Meals provided at a restaurant off-site, even if paid for by the employer, would not satisfy this condition.

Both tests must be satisfied for the exclusion to apply. Section 119 applies to meals provided “in-kind,” meaning the actual food itself. Cash allowances or reimbursements given to employees to purchase their own meals are generally considered taxable wages and are not excludable under this provision.

Qualifying for the Lodging Exclusion

The rules for excluding the value of employer-provided lodging are even more stringent than those for meals. To qualify, the lodging must meet both the “convenience of the employer” and “on the business premises” tests required for meals, in addition to a third requirement.

The third test is that the employee must be required to accept the lodging as a “condition of employment.” This means the employee cannot properly perform their job duties without living in the housing provided by the employer. It is not enough for the lodging to be convenient; it must be indispensable for the role.

Examples that illustrate this requirement include a live-in manager of an apartment complex who must be available to respond to tenant emergencies at any hour or a caretaker for a remote estate who needs to be on-site for security and maintenance. A worker at a remote arctic research station with no other available housing would also meet this condition. The focus is on whether the job would be impossible to perform if the employee lived elsewhere.

If an employee’s lodging successfully meets all three of these tests, the tax exclusion also extends to the value of lodging provided to the employee’s spouse and any dependents who reside with them on the business premises. This value is also excluded from the employee’s gross income.

Tax Reporting and Payroll Implications

When meals and lodging qualify for the exclusion under Section 119, the fair market value of these benefits is excluded from the employee’s gross income. This means the value is not reported as taxable wages on the employee’s Form W-2. The amount is omitted from Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages and tips).

As a result of this exclusion from wages, the value of qualifying meals and lodging is not subject to federal income tax withholding. It is also exempt from both Social Security and Medicare taxes (FICA taxes). This provides a tax savings for both the employee, who does not pay these taxes on the benefit’s value, and the employer, who does not have to pay the corresponding employer’s share of FICA taxes.

The costs of providing these benefits are considered ordinary and necessary business expenses. While an employer can generally deduct the full cost of providing qualified lodging, the deduction for meals is more limited. Only 50% of the cost of meals can be deducted, and this deduction is scheduled to expire after 2025 unless extended by Congress. By deducting these expenses, a business can lower its own taxable income.