Room and board instead of wages

[oceanlovin'ea]

I do payroll for a motel that furnishes rooms to many of the people that work there. They pay them an hourly rate and when I do the payroll checks, the motel cashes the checks and keeps the room rent and gives them the rest of the money.

The owner just asked me if they could give them the room for say half of their work and then pay them for the rest. He feels it would save them on payroll taxes.

I know that barter income is taxable to the person who receives the service or goods. But the company may not have to withhold payroll taxes on that exchange. Is that possible to do? Have any of you ever done that before? How do you keep track of the services received. Do you give them a 1099 for it?

Any information would be helpful. Thanks.

Linda F

[jainen]

He can do it

He can do it, but it makes for messier bookkeeping, not cleaner. Payroll tax would not change. It's a taxable fringe benefit or an in-kind payment of wages.

Yeah, I know--"convenience of the employer" and all that nonsense. Forget it.

[DaveO]

If they made acceptance of the room and board a condition of employment it would not be considered income to the employee.

[dsi]

If they made acceptance of the room and board a condition of employment it would not be considered income to the employee.

This is the position I would suggest.

[OldJack]

If they made acceptance of the room and board a condition of employment it would not be considered income to the employee.

But there has to be a justifiable reason the employer requires the employee to reside on the premises for it to not be taxable income. It would be hard to justify several people living in the hotel as necessary for the employer.

Yep, it sounds like taxable income and since it is an employee it is gross wages subject to payroll taxes. Most probably handle this as a misc (rent) deduction on the pay stub. The employer books then zeros the misc deduction (with a debit to the misc ded liability account) and credits rent income. Also, if it was considered Barter income from services it would be self-employment income subject to SE tax but as an employee it isn't barter income.

[oceanlovin'ea]

Justifiable reason?

To make sure they come to work or you know where to find them if they don't.

Many of these people didn't have somewhere else to live. Part of the motel is weekly rentals so I'm sure this is where these people stay.

If they are let go or quit, they leave the premises.

So it would not change the amount recorded as payroll or the payroll taxes, correct?

Thanks.

Linda F

[DaveO]

The sporadic nature of the motel business

Should be reason enough to have them on premise. IRC 119 list 3 conditions for meals and lodging to be excluded from taxable income..
1. It is furnished on the business premise.
2. It is furnished for the employer's conveinence.
3. In the case of lodging only, the employee accepts it as a condition of employment.

Are the employees called to duty in the middle of the night when extra rooms are needed? To me, that would cinch it.

[wv112]

Do all the employees live there or just some of them?

[OldJack]

To make sure they come to work or you know where to find them if they don't.

Many of these people didn't have somewhere else to live. Part of the motel is weekly rentals so I'm sure this is where these people stay.

If they are let go or quit, they leave the premises.

So it would not change the amount recorded as payroll or the payroll taxes, correct?

Thanks.

Linda F

They may be justified reasons to some but it just sounds like excuses and living expenses to me. The employer's only substantial convenience involved here is to avoid payroll taxes and avoiding individual income taxes. Were I an IRS auditor I would call it taxable payroll wages.

[oceanlovin'ea]

Waiting for answer

I called the man last night and left a message for him to call me. I haven't heard from him yet. I asked him if all employees lived on the premises or not.

Will let you know when I get a response.

He is definitely looking for a way to reduce payroll taxes. But if you have employees at a property like that you will have high payroll taxes.

Linda F

[Bees Knees]

The court cases I glanced at on the subject seem to indicate the "convenience of the employer" standard for excluding the benefit as a fringe benefit would not fit the circumstances you described. One case had a group of employees live in employer provided housing so that they would be available for emergencies. But it wasn't a "you must live here if you want the job" type deal. It was convenient for them to live there, but living anywhere else in town would have allowed them to perform their duties just as well.

In your case, living there so he knows where to find them if they don't show up for work would get shot down instantly. The employer can know where to find them in a number of locations in housing off site, if he were to simply require them to give him their current address at all times.

If your client is going to attempt that route, the employees have to be required to live their, not just allow any who wants to live there to do so because they can't find any other place to live.

[jainen]

it's not enough

>>the employees have to be required to live there<<

Also, it's not enough for him to simply make that requirement, and thereby get out of payroll taxes. It is not a deductible expense unless it is reasonable, which means there must be a legitimate business purpose for it. A full-time manager should probably live on site, but not the housecleaning staff.

The danger is not from the IRS. You can deal with that, and the worst that would happen is a little extra tax. But some day one of those marginal employees is going to file a claim for unemployment insurance based on the value of housing earned, or a labor board complaint based on, well, slavery.

[outwest]

I think there is a narrow doorway to do this...

but this client is trying to drive a truck through it. All you'll get is a wreck.

Doug

[OldJack]

rent is rent

Another problem that shoots this case down is that this employer is in the business of "renting" and this is just another way of having renters. That of course means he must recognize the rent income which means he also has to recognize payroll withholding of the rent collected.

[oceanlovin'ea]

Talked to client

He said that some of the employees live there and others don't. That statement about him knowing where they are was from me not him.

A lot of these people are people with few options in life. It might even give them a "clean" place to live instead of projects or slums that they had been living in. Or not having to live with relatives.

So it is probably more of a convenience factor for the employees that the owner. The owner and managers do stay on the property as well as some of the desk clerks. But maintenance people and housekeeping staff also live there.

When I explain things to him, hopefully he will understand the pros and cons and see the ramifications of trying to do such a thing.

Thanks for all your comments. This has proved to be an interesting discussion.

Linda F