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Tuesday, December 28, 2010

Lodging Provided to Employees: Taxable or Not?


Do you provide lodging to an employee? Are you a school that allows the headmaster or other employee to live in a school-owned property? Are you a teaching hospital that provides housing to its residents? The IRS has definitive rules for whether or not lodging is a taxable event to the employee. Special rules exist for educational institutions and will also be discussed.

The value of employer-provided lodging will be excludable from an employee’s gross income and not subject to federal income tax withholding only if: (1) the lodging is furnished on the business premises of the employer; (2) the lodging is furnished for the convenience of the employer; and (3) the employee must accept the lodging as a condition of employment. If the three tests are met, the value of the lodging is excludable and not subject to withholding.

In Rev. Rul. 68-579, the value of lodging provided by a teaching hospital was includible in the gross income of its employees. The employees were required to accept employer-provided housing unless housing was unavailable or a waiver was granted. Their compensation included a housing supplement that was reduced by a rental amount if they lived in hospital-owned housing. The IRS ruled that the lodging was not necessary to enable the employees to perform their duties since they were able to meet their obligations regardless of where they resided. Moreover, the employees, whose primary duties consisted of patient care, did not perform a significant portion of their duties in the lodging. The value of the lodging qualified as wages for purposes of FICA and federal income tax withholding.

The requirement that the lodging be on the business premises is very specific. A business premise generally means the place of employment of the employee and the lodging must be on the business premises and not simply near them. Lodging one mile away from where the employee worked, or a “short two blocks away” did not fit the on-the-premises test. This may be the case with most school- or hospital-provided lodging. Many times, the house provided is within the neighborhood but not on the premises. If the lodging is not on the employer’s premises, its value must be included in the employee’s gross income and, consequently, subject to federal income tax withholding, FICA and FUTA.

The “convenience of the employer” test was met in the following circumstances according to IRS materials:

  • A construction supervisor who was required to be near the construction site;
  • A Chamber of Commerce president during his one-year term of office;
  • Construction workers in remote areas;
  • The executive housekeeper and hall manager in a government housing project;
  • Undertakers and clerks for a funeral home, the religious beliefs of whose clients required burial within 24 hours after death;
  • A city park foreman who assumed additional duties as caretaker of a park building;
  • A hotel manager;
  • A physician’s receptionist who was required to answer the telephone and clean offices after hours; an
  • Domestic servants subject to 24-hour call.

The requirement that the employee be compelled to accept the lodging as a condition of employment means that the employee is required to accept the lodging to be able to properly perform the duties of the job. The on-site lodging must be indispensable to the proper discharge of the employee’s duties.

Examples:
An employee of an institution is given the choice of residing at the institution free of charge, or of residing elsewhere and receiving a cash allowance in addition to regular salary. If he elects to reside at the institution, the value of the lodging will be included in gross income and subject to withholding because his residence there is not required for him to perform properly the duties of his job.

The value of lodging in a home furnished without charge by an exempt religious organization to its full-time representatives, who were required to accept the lodging as a condition of employment and as the primary place for performing their duties, was excludable from the employees’ gross income and, thus, was not subject to federal income tax withholding. Rev. Rul. 77-80, 1977-1 CB 36.

Special Rules Exist for Educational Institutions
The value of qualified campus lodging furnished to an employee of an educational institution during the taxable year is not included in the employee’s gross income if it is equal to the fair rental value. However, if the fair rental value of the lodging is more than the amount of rent the employee pays, then the difference is included in income. Fair rental value is equal to the smaller of 5% of the appraised value of the lodging, or the average of rentals paid by individuals (other than employees or students) for comparable lodging held for rent by the educational institution. If the amount an employee pays is less than the smaller of these amounts, the difference must be included in income. Whether the fair rental value is equal to or less than 5% of the value is reviewed by a qualified independent appraiser on an annual basis. Annual appraisals are not required.

“Qualified campus lodging” is located on or near a campus of the educational institution and is furnished to an employee, his spouse, or any of his dependents by or on behalf of such institution for use as a residence.

Example:
The headmaster rents a home from the university that is qualified campus lodging. The house is appraised at $100,000. The average rent paid for comparable university lodging by persons other than employees or students is $7,000 a year. The headmaster pays an annual rent of $5,500. He does not include in his income any rental value since the rent he pays equals at least 5% of the appraised value of the house (5% × $100,000 = $5,000). If he paid annual rent of only $4,000, he would have to include $1,000 in his income ($5,000 $4,000).

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