Payroll in Practice: 9.5.2023

Question: An employer wants to pay the rent for housing for an employee assigned to work on-site at a project. The assignment is expected to last for two years. Is the employer-paid rent taxable income to the employee?

Answer: Generally, the provision of housing to an employee by the employer is taxable income to the employee unless it meets one of two exceptions.

Under the first exception, employer-provided housing may be excluded from taxable income when the housing qualifies as a travel expense. Travel expenses are excludable from the employee’s income if the employee is traveling away from their tax home. The employee’s tax home is the location of their principal place of work rather than the location of their personal residence.

If the employee is temporarily assigned to a location that is not the employee’s tax home, the payment of the rent at the temporary location likely qualifies as a travel expense.

A “temporary assignment” is defined as one that is expected to and does last less than one year. Ordinary and necessary business-related travel and temporary living expenses paid or reimbursed by the employer under an accountable reimbursement plan may be excluded from the employee’s income. This includes employer-provided housing.

However, the assignment creates a new principal work location when it is indefinite or permanent and is expected to last more than one year, even if it does not. This creates a new tax home for the employee.

Since the assignment in question is expected to last for two years, the assignment is “permanent” or “indefinite” from a tax standpoint. This establishes a tax home for the employee at the job location; so, the exemption for travel expenses at a temporary job site does not apply.

Under a second exception, the value of housing may be excludable from the employee’s pay if the housing is on the employer’s business premises, is furnished for the employer’s convenience, and the employee accepts the housing as a condition of employment.

Generally, “the employer’s premises” means the employee’s usual workplace. “Employer convenience” means there must be a substantial business reason for providing the lodging other than providing the employee with additional pay.

The exclusion does not apply if the employee may choose additional pay instead of the housing or may choose not to live in the employer-provided housing.

Examples of employer convenience include situations in which the employee must be available on site at all times. For example, a building superintendent of an apartment building or miners working at a remote mining operation where employees could not do the job properly without being furnished the lodging.

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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