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Friday, March 23, 2018

Lodging Provided to Employees: Taxable or Not?

Do you provide lodging to an employee? Perhaps your school allows a headmaster or other employee to live on school-owned property. Or maybe your teaching hospital provides housing to residents. If you aren’t clear on IRS rules regarding taxability of employer-provided housing, you could be under- or over-reporting your employees’ taxable income.
In the eyes of the federal government, nonprofits are employers just like any other business. And that means fringe benefits like employer-provided housing generally are subject to income tax withholding, as well as Social Security, Medicare and federal unemployment taxes—with some exceptions.
The value of employer-provided housing is not subject to income or payroll tax withholding if the situation passes the following three tests:
  1. The lodging is furnished on the business premises.  An apartment “a short two blocks away” from the employer’s premises fails this test.
  2. The lodging is furnished for the convenience of the employer.  The on-site lodging must be indispensable to the proper discharge of the employee’s duties. For example, a city park foreman who also serves as caretaker of the park building would need to reside in that building.
  3. Acceptance of the lodging is a condition of employment. If the employee is given the choice of accepting the lodging or receiving a cash allowance, then the lodging is not required for the performance of the job.  
Consider how these tests might come into play for three different types of nonprofits.
Example: Teaching Hospital
In Revenue Ruling 68-579, employees of a teaching hospital were required to accept employer-provided housing unless housing was unavailable, or a waiver was granted. 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.
Example: Educational Institution
 Educational institutions have special rules for units provided to employees at below fair market value that are not provided for the convenience of the employer. The value of “qualified campus lodging” (located on or near campus) is generally excluded from an employee’s gross income as long as the employee pays at least a nominal rental amount. 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 rents paid by individuals (other than employees or students) for comparable lodging held for rent by the educational institution.
For example, a professor rents a home from the university. The house, which is qualified campus lodging, was appraised at $100,000. The average rent paid for comparable university lodging by persons other than employees or students is $7,000 per year. The professor 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.
Example: Religious Organization
The full-time representatives of an exempt religious organization were required to accept lodging as a condition of employment. Because that lodging was provided in the primary place where they would perform their duties, the value of that lodging was excludable from the employees’ gross income and not subject to federal income tax withholding.
The value of a parsonage provided by a religious organization to a rabbi or minister of the gospel may also be excluded from income, but the individual receiving the parsonage must be recognized by the religious order as an ordained minister (or equivalent) and must spend the majority of his or her time as an employee conducting religious services, sacerdotal duties, or church administrative activities.
Still Unsure?
Above all how you are reporting your employees’ taxable income should be in line with the IRS rules regarding taxability of employer-provided housing.  Contact your local Armanino nonprofit expert to discuss this and other questions about the taxability of your nonprofit’s activities.


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