WORKING OVERTIME? ENJOY A TAX-FREE MEAL WITH YOUR EMPLOYEES!

Are you and/or your staff required to work overtime occasionally? If so, both you and your employees may be entitled to tax-free supper money. What’s more, even sole proprietors can take advantage of this fringe benefit, just like partnerships and corporations with employees, as long as the IRS conditions are met.

HOW IT WORKS

Here’s how the tax deduction works. Let’s say, you and one or more of your employees have to work after hours to complete a business task. You take $56 and give each employee the same amount to buy dinner. This money is tax-free for both you and your employee(s) since the IRS considers this meal allowance a “De Minimis Exclusion for Occasional Meal Reimbursements.” In addition, your business gets a 50-percent tax deduction for the cost.

CONDITIONS TO MEET

To take advantage of this tax-free supper money benefit, three conditions must be met:

1. IT OCCURS ON AN OCCASIONAL BASIS

The meal or allowance is reasonable in value and is not provided regularly or frequently. In other words, this deduction does not apply to a company that has a policy of reimbursing employees for breakfast or dinner when they are required to work an extra hour before or after their normal work schedule.

2. IT IS PROVIDED FOR OVERTIME WORK

Overtime work necessitates an extension of the employee’s normal work hours. Note, “overtime” is any extension of the employee’s regular work schedule, so it can include morning hours or any other time that your employee does not normally work.

3. IT ENABLES OVERTIME WORK

The meal or allowance is provided to enable the employee to work overtime. The IRS regulation also states that meals provided on the employer’s premises that are consumed during the overtime period, or meal money expended for meals consumed during that period satisfy this condition. Even though it may not be under an employer’s control, you should provide the meal money with the expectation that your employees will use the money to eat.

Finally, this benefit cannot be calculated based on the number of hours an employee works. For example, you cannot offer, say, a meal allowance of $5 per hour for each hour worked over 8 hours. If you do so or fail to meet any of the other three stated conditions, the benefit no longer qualifies for a deduction and is considered taxable compensation to the employee and is subject to withholding and payroll taxes.

SOME FLEXIBILITY

As mentioned, even a sole proprietor is eligible to take advantage of this benefit, on occasion, when work warrants it. However, if you have employees, it is generally recommended that you only take this deduction for your personal meals for those times when you are working overtime with other employees to whom you also extend this tax-free supper money benefit. Which employees you offer it to, is up to you though. The IRS has no rules regarding discrimination in this area. As a result, you have the discretion to offer this supper money benefit to any of your employees, including solely to officers or partners, managers, etc., even if they are highly compensated.

With regard to a meal that is “reasonable in value,” it is important to point out that the IRS does not specify an upper limit for a meal allowance. As a result, an allowance might be higher in an area where there are only expensive restaurants as opposed to one where there are lower or more moderately priced dining options available.

KEY POINTS TO REMEMBER

Use this benefit only occasionally when work warrants it and make sure the meal allowance is reasonable based upon the local dining options available.

As a boss, extend the same meal allowance to other employees who are also working late.

Do not make this meal benefit routine. Nor should it be a formal company policy, part of a contractual employee benefit, or based on the amount upon number of hours worked.

THIS DEDUCTION ENDS IN 2026

Prior to the Tax Cuts and Jobs Act (TCJA), the supper money fringe benefit was 100 percent deductible. After the passage of the TCJA, the deduction was reduced to 50 percent through 2025. In the tax year, 2026, while the meal allowance will remain tax-free to the employee, the business deductibility of the cost will end entirely.