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Working Overtime? Take Advantage of Tax-Free Supper Money

Working Overtime? Take Advantage of Tax-Free Supper Money

February 07, 2024

Tax law often discriminates against company owners, granting them no or fewer fringe benefits. But you, the owner, are not discriminated against when it comes to supper money. It works like this:

  • The supper money fringe benefit is for defined employees.
  • The IRS supper money rule states that the term “employee” for this purpose means anyone who receives supper money.1

That means you can take this benefit for yourself, even as a sole proprietor. You also qualify for this benefit if you operate your business as a corporation or a partnership.

Caution. Even though you, as the boss, technically meet the “employee” definition, we recommend that you use this rule for your personal meals only in situations where you also provide the meal allowance to other employees who stay late and work with you.

Since you are the boss and have more control over your hours than employees do, it’s easier to prove the necessity of overtime work when your employees are also present.

The Deduction:

The supper money fringe benefit provides you and your employee(s) with tax-free meal money and gives you, the employer, a tax deduction for 50 percent of the meal money.2

Example. You and your employee work overtime to complete a task. You take $56, and you give the employee $56 for dinner. If you meet the four rules below, then you as the employer deduct half of the $112. The $56 is tax-free to both you and the employee.

Two Things to Know:

The supper money fringe benefit was 100 percent deductible before the Tax Cuts and Jobs Act (TCJA), which reduced the deduction to 50 percent for tax years 2018–2025.3

What happens in 2026? It gets worse: the TCJA eliminates all tax deductions for supper money.4 The money remains tax-free to the employee, but not deductible by the business.

Four Rules for Success:

The regulations allow supper money as an excludable fringe benefit when the benefit satisfies the following four conditions:5

  1. You provide the benefit only
  2. You pay no more than a reasonable
  3. The meal enables the employee to work
  4. You do not calculate the benefit based on the number of hours For example, a $30 allowance per hour of overtime is a no-no. You can’t do that. The way to provide the benefit is to give a discretionary meal allowance, such as $56. 

Consequence of violation. If the payment of supper money does not meet the four rules, it is taxable compensation to the employee and subject to withholding and payroll taxes. (This makes for unhappy employees.) But the employer may be less unhappy because compensation creates a 100 percent deduction, albeit while also creating employer payroll taxes.

The Term “Occasional”:

The IRS regulation provides that “occasional” means “not routine and not regular.” Based on this definition and other IRS guidance, we can give you a few key guidelines:6

  • If the meal allowance is a contractual right of the employee, then you probably violate the more- than-occasional rule.
  • Whether an allowance is occasional is determined on a case-by-case basis.
  • It’s best if the allowance is at the discretion of the employer rather than formalized in a company policy.

The Term “Reasonable”: 

The IRS does not place an upper dollar limit on the amount you can give your employees for a meal allowance. The only guidance is that the amount must be “reasonable.”

An expensive meal is reasonable in the right circumstances. For example, if the only restaurants near your office are very costly, you need to give your employees enough money so they can afford the food.

Consider what would constitute a normal meal in your workplace or area of the city. Ask yourself this question: If an IRS agent strolled into your place of business and saw the receipt, could you provide a good justification for the expense?

Working Overtime:

The meal allowance must enable you and your employee to work overtime. The IRS regulation says in one example that you accomplish this if the employee eats the meal during the period that he or she works overtime.7 

In the more likely scenario, what if your employee eats after work hours are over? The IRS has not addressed this other than to say that you must provide the meal money to enable the overtime work. With this in mind, you should provide the meal money with the expectation that your employees will use the money to eat. But once you provide the money, you cannot control how your employees spend it.8

Morning hours. “Overtime” is any extension of the employee’s normal work schedule.9 This can include morning hours or any other time that your employee does not normally work.

Discrimination Allowed:

No discrimination rules apply in this area. You can offer the supper money benefit to any of your employees, including solely to officers and the highly compensated.

The IRS examines this benefit on an employee-by-employee basis. If you provide meals too frequently to a single employee, then the meals likely are not occasional (and are thus taxable) with regard to that person.

Takeaways:

You’ve no doubt been in this situation before: Work suddenly pours in and creates a mountain of paper on your desk. You need your employees to work late so everything gets done.

How do you make this situation a little better for your employees and yourself? Tax law gives you a suggestion: provide a supper money benefit so you and your employees can buy food. Your business gets a 50 percent deduction for the cost, and you and your employees receive the benefit tax-free.

 To provide the supper money benefit, you must follow four rules:

  1. You provide the benefit only
  2. You spend only a reasonable
  3. The meal or allowance enables the employees to work overtime (beyond their normal hours).
  4. You don’t calculate the meal benefit based on the number of hours the employee