Tax on employer-provided housing and lodging
A guide for employers who provide FREE (or subsidized) onsite housing or monetary allowance to their employees while on travel assignments
Tax on Employer-Provided Housing and Lodging
Some employers offer free or discounted housing to their employees. The Internal Revenue Service imposes tax on employer-provided housing and lodging. This is because employer-provided housing is considered a fringe benefit, and its value is usually taxable. Federal tax law provides certain exceptions, however. Whether the value of employer-provided housing and lodging is taxable -- and the determination of what amount is taxable -- depends on the particular circumstances.
The Basics and Definition of Fringe Benefit
What is a Fringe Benefit?
A fringe benefit is an extra benefit supplementing an employee's salary, for example, a company car, subsidized meals, health insurance, etc.
Under federal tax law, most fringe benefits that employees receive are taxable as income. Therefore, as an employer you report the taxable value of fringe benefits on an employee’s W-2 form. Subsequently, the employee will use the information on their W-2 to fill out his annual tax return. IRS regulations require an employer to determine the taxable value by subtracting any amount the employee paid for the benefit from the fringe benefit's fair market value.
Fringe benefits are also subject to Social Security, Medicare and federal unemployment taxes. To determine the taxable value of employer-provided housing and lodging, subtract the rent paid by the employee from the property's fair market value.
The Status of Tax on Employer-Provided Housing and Lodging
As an employer, you may provide housing to employees for a variety of reasons. Such reasons including not-for-profit organizations that maintain institutions of higher education, historic sites, housing facilities, and other premises that require on-site staff.
So, like other fringe benefits, free or discounted employer-provided housing and lodging is usually subject to income and other taxes. To determine the fair market value of the housing provided to your employee, you may want to check your local newspaper listings for comparable rental properties. You can also ask your local realtor for an estimate of the property’s rental value.
You report the net value of the employee’s lodging fringe benefit in Box 1 of the employee’s W-2 form. Subsequently your employee then must also declare this value as income on Line 7 of IRS Form 1040.
For example, Let's say your employee pays the you $300 a month for the housing and the property's fair market rental rate is $700 a month. You must add $4800 (400 x 12) to the taxable income you are reporting on the employee's W-2.
Employer-Provided Housing and Lodging Not Subject to Taxation
Unless an exception applies, the full value of the housing is treated as additional taxable compensation to the employee. Full or partial exceptions apply if the housing is:
1. Employers’ Convenience
As an employer, you can exclude the value of housing you provide to an employee from her taxable income if the lodging meets the following three conditions:
a. The employer must furnish the lodging on its business premises.
Business premises is generally defined as the place of employment. Unfortunately, your mere ownership of the premises is not sufficient. Courts have ruled that the lodging needs to be living quarters that constitute an integral part of your business property.
Employer-provided housing and lodging must be geographically integrated within a campus. Additionally, it could also be above an organization’s location of charitable activities. Furthermore, it could also be on the premises where the employer conducts a significant portion of its business, such as a residence off-site from the main location but where significant charitable activities are conducted. A special provision in the tax code also qualifies certain lodging furnished in a camp in a foreign country by or on behalf of the employer as exempt lodging.
b. The lodging must be furnished for the convenience of the employer.
For employer-provided housing and lodging to be exempt from taxation, the employer must have a valid business purpose for providing housing beyond giving the employee additional compensation.
If the employer’s work site is located a substantial distance from other housing options, the IRS would likely conclude that the employer is providing the lodging for the convenience of the employee. Unfortunately, a written statement in the employment contract is not sufficient to meet this test. For the housing to qualify, therefore, there must be a direct relationship between the lodging furnished and the business interests of the employer.
c. The employee must accept the lodging to properly perform the duties of employment.
He or she cannot have an option to accept cash in lieu of the lodging. Therefore, the employer-provided housing and lodging is only exempt from taxation if the employee cannot have the option of accepting or declining the lodging.
Examples include lodging furnished because the employee is required to be available for duty at all times. Or because the employee would not be able to perform the service without the lodging.
Judy works for Hope Medical Center. Hope, the employer gives Judy the choice of living at the hospital free of charge or living elsewhere and receiving a cash allowance. This cash allowance is in addition to her regular salary. If Judy chooses to live at the hospital, the hospital cannot exclude the value of the lodging from her wages. Why?
Because she is not required to live at the hospital to properly perform the duties of her employment. If any of these conditions are not met, the employer must include the net value of the lodging on the employee’s W-2 form. Subsequently, the employee must report that amount as income on his or her tax return.
2. Temporary Work Locations
In some cases, an organization will cover housing costs for an employee for a temporary assignment or project outside his or her normal work area. For the employer-provided housing and lodging to be exempt from taxation, the following 2 factors come into play:
If the employee has more than one place of work, the “main place” or “tax home” can be identified based on:
Let's say a Alexandra lives in Temecula, California and holds a seasonal job for eight months each year, earning $60,000. She works the other four months in Miami, also at a seasonal job, and earns $40,000. Therefore, the main place of work, which is her tax home—is Temecula under the hours and income test.
Based on these rules, Let's say John, a resident of Dallas, Texas is hired for an indefinite period of time in Seattle, Washington. John chooses to keep his family residence in Dallas until the end of the school year. His lodging in Seattle is paid for by his employer.
This amount will generally not qualify for tax-free treatment.
However, if John is hired for a specific project, can prove his or her tax home remains in the original city Dallas, and the project is expected to last less than one year, the lodging may qualify for tax-free reimbursement under the organization’s accountable plan.
See IRS Publication 463 for more information and examples for temporary work locations and travel expenses.
3. Lodging Furnished by Educational Institutions
Employer-provided housing and lodging is also common with educational institutions or academic health centers. These provide free or discounted rent. The tax code allows an exemption for the value of qualified campus lodging for amounts in excess of the lesser of:
- Five percent of the appraised value of the qualified campus lodging or
- The average rent paid by individuals for lodging provided by the institution. This is the rent paid by regular residents, NOT employees or students during the year for comparable lodging. In other words, the fair market value of residential rental space.
Let’s say Stanford University owns residential rental properties on and near campus. It provides a discounted rental rate for employees of the university. Non-university employee renters pay the full market value. The university property managers determine that a rental unit of 1,800 square feet would rent at market value for $4,000 per month ($48,000 per year).
Assuming the appraised value of the home as of July 1 is $700,000, 5 percent of the appraised value in this scenario would be $42,000. The lesser of these two amounts is $42,000 for the year, so if a faculty member pays the college $3,000 per month in rent for the property ($36,000 per year), the additional non-cash compensation for that faculty member would be $12,000 per year ($48,000 minus $36,000).
The additional $6,000 of value (the $48,000 full-market rental rate less $42,000, which is 5 percent of the appraised value) is a nontaxable benefit that is excluded from taxable income.
Tax on Employer-Provided Housing and Lodging by the States
California seems to be the only state that imposes tax on employer-provided housing and lodging. If there are any other states, please let us know.
What taxes apply to Employer-Provided Housing and Lodging in California?
Lodging furnished for the employer's convenience, on the employer's premises, and as a condition of employment is subject to SUI, ETT and SDI. SUI is State Unemployment Insurance, ETT is Employment Training Tax and SDI is State Disability Insurance. State Income Tax (SIT) does not apply to employer provided housing in California.
Method of Calculation:
California does not tax 100% of the fair market value of employer provided housing. Instead, the tax applies only on two thirds (2/3rds) of the fair market value of the property in which the employee resides free or at a discounted rate.
Janice is a property manager at Stay Cool Beach Homes. She is required to stay on the property she manages and she meets all the three conditions of the employer's convenience, on the employer's premises, and as a condition of employment. The unit she lives in has a fair market value of $2,400 per month, and she lives there 100% FREE. She also gets a small salary of $2,000 per month.
Janice’s employer must report $1,600 for the purposes of SUI, ETT and SDI through payroll. This is in addition to her regular salary of $2,000 per month. Therefore, per month Janice’s SUI, ETT and SDI subject amount is $3,800. This is subject to the $7,000 wage limit for SUI and ETT, and $114,967 for SDI (in 2018).
How to report Employer-Provided Housing and Lodging on W-2
The 2/3rds amount subject to SUI, ETT and SDI is reported on box 14 of W-2 as Housing Allowance. This box is for informational-only items and therefore has no tax consequence on the recipient’s income tax, whether Federal or State.
How to report Employer-Provided Housing and Lodging on California DE9 and DE9C
The 2/3rds fair market value of the employer provided housing must be reported on DE9 and DE9C as part of the regular wages subject to SUI, ETT and SDI taxes. On DE9C, the amounts are included in the Total Subject Wages field but excluded from PIT wages. This is because they are not subject to PIT (State Income Tax).
Setting up the pay code to for SUI, ETT and SDI taxes only can be a challenge. But if you know your payroll software well, if it offers such features, it should be easy. The challenge is that this amount is not reportable for Federal purposes, but it is required for California.
Workers’ Comp Reporting of Employer Provided Housing
For workers’ comp purposes, the full fair market value must be reported. Yes! Sounds crazy, but it’s true. You must convert the 2/3rds into the full 100% fair market value before reporting your wages to your workers comp company. In other words, you must report the full fair market value for workers comp purposes regardless of what portion was taxed.
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