You can exclude the value of lodging you furnish to an employee from the employee's wages if it meets the following tests.
- It is furnished on your business premises.
- It is furnished for your convenience.
- The employee must accept it as a condition of employment.
Different tests may apply to lodging furnished by educational institutions. For information, see section 119(d) of the Internal Revenue Code.
This exclusion does not apply if you allow your employee to choose to receive additional pay instead of lodging.
On your business premises. For this exclusion, your business premises is generally your employee's place of work. (For special rules that apply to lodging furnished in a camp located in a foreign country, see section 119(c) of the Internal Revenue Code and the related regulations.)
For your convenience. Whether you furnish lodging for your convenience as an employer depends on all the facts and circumstances. You furnish the lodging to your employee for your convenience if you do this for a substantial business reason other than to provide the employee with additional pay. This is true even if a law or an employment contract provides that the lodging is furnished as pay. However, a written statement that the lodging is furnished for your convenience is not sufficient.
Condition of employment. Lodging meets this test if you require your employees to accept it because they need to live on your business premises to be able to properly perform their duties. Examples include employees who must be available at all times and employees who could not perform their required duties without being furnished the lodging.
It does not matter whether you must furnish the lodging as pay under the terms of an employment contract or a law fixing the terms of employment.
Example. A hospital gives Joan, an employee of the hospital, the choice of living at the hospital free of charge or living elsewhere and receiving a cash allowance in addition to her regular salary. If Joan chooses to live at the hospital, the hospital cannot exclude the value of the lodging from her wages because she is not required to live at the hospital to properly perform the duties of her employment.
S corporation shareholder-employee. For this exclusion, do not treat a 2% shareholder of an S corporation as an employee of the corporation. A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power.
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