Can I legally get work to pay my rent?
November 18, 2013 6:20 PM   Subscribe

So I've done the math, and if my job pays me $750 a month less, and uses that money to pay my rent, I actually end up about $150 ahead.

Ie. I'm getting paid less, but because I'm not paying rent I'm actually getting an extra $75 a paycheck of spending money. I'm pretty sure I can talk them into this if it benefits me and doesn't affect them, or if it benefits both of us.

Do they still have to pay the same employment taxes, or do they get a break too because they're paying me less? I'm a little foggy on that. But to me it seems like a great way to give me a 'raise' without actually giving me a raise.

Or am I just dumb? Because that's what usually happens.
posted by anonymous to Work & Money (24 answers total) 1 user marked this as a favorite
Do you mean they'd be paying your rent pre-tax? I'm honestly not sure how you arrived at this theory.
posted by showbiz_liz at 6:21 PM on November 18, 2013

If you're paying the rent pre-tax is it knocking you into a lower tax bracket? If so, you'll have less taken from your check in taxes.
posted by triggerfinger at 6:24 PM on November 18, 2013

I am neither a lawyer nor your lawyer, but I have to imagine that the IRS hasn't actually left this giant ridiculous loophole open.
posted by The Michael The at 6:27 PM on November 18, 2013 [8 favorites]

Employer-paid housing is generally considered a taxable fringe benefit by the IRS, so you wouldn't come out ahead. Here's an overview.
posted by magicbus at 6:28 PM on November 18, 2013 [16 favorites]

I actually had an employer pay my rent. It was a post tax benefit-how would it not be? Unless it's pretax, it's a zerosum benefit.
posted by Tandem Affinity at 6:28 PM on November 18, 2013

What you are talking about are fringe benefits, and they are taxable and the value is added to your W-2 income statement. If fringe benefits were not taxable, everyone would take their salary in housing, food, gasoline, cars and phones and pay no taxes.

Sorry, but you can't avoid taxes this way.
posted by JackFlash at 6:28 PM on November 18, 2013 [2 favorites]

I'm not a CPA, but I have done the books and payroll for our small business in the past. There are only certain things that are allowed as pre-tax payroll deductions. Benefits like your medical, dental, etc., certain retirement contributions, and so on. If we could just have anything we wanted taken out before taxes, why not also pay all the bills and get a fistful of gift cards to the point where your employer is cutting you a check for $0?

Points for creative thinking, but also keep in mind your W2 (a copy of which goes to the IRS) shows your gross pay, all your deductions, and your net pay. You might get away with it for a couple years, but as a person who went through an IRS audit (bookkeeper's error), trust me: You do not want to be in that situation. Ever.
posted by xedrik at 6:29 PM on November 18, 2013

It wouldn't change anything because the money they used to pay your rent would still be imputed to you as income and would appear on your W-2 and you would have no extra money -- you would be in exactly the same situation with regard to gross income, net income and taxes. There are some very limited exceptions (they'd have to own the place, you would have to be required to live there as a condition of the job and it would have to be to the benefit of the employer for you to live there.
posted by Lame_username at 6:29 PM on November 18, 2013 [1 favorite]

In general, benefits are taxable unless specifically exempted in law (for instance, health insurance). This is to prevent tax avoidance strategies based on changing employee compensation from cash into non-cash benefits. If it was possible to avoid taxes by not being paid in cash, you'd magically find that people are paid in, for instance, gift certificates. I am not aware of any tax benefits at the federal level for housing benefits. Such tax benefits might exist locally, but I doubt it.

If you're paying the rent pre-tax is it knocking you into a lower tax bracket?

The US tax system (assuming OP is in the USA) is progressive; moving between tax brackets only affects marginal income past the bracket. In other words, you will not get a huge difference in taxes if you are right on the tax bracket line. This is deliberate. It is a misconception that "moving up a tax bracket" matters much to anyone.
posted by saeculorum at 6:29 PM on November 18, 2013 [3 favorites]

triggerfinger -- that's not how marginal taxation works. Everyone pays 10% on their first $8,700, 15% on dollars $8,701 - $35,350, 25% on dollars $35,351 - $85,650.

If there are 2 people, and one makes $85,650, and one makes $85,651, they pay exactly the same taxes on the first $85,650, and then the second person pays 28 additional cents on that last dollar.

But yeah, this would all be taxable benefits, so it wouldn't make a lick of difference either way.
posted by brainmouse at 6:29 PM on November 18, 2013 [6 favorites]

I think that, in the US, your company paying your rent would be considered a taxable fringe benefit and both you and your employer would still be responsible for paying taxes on that sum.

There are definitely some fringe benefits that convey tax advantages to both you and your company, because of our complex system of using tax breaks to reward certain behavior, and some of those exemptions are listed in the link above.
posted by muddgirl at 6:29 PM on November 18, 2013

Here is the Canadian summary of Fringe benefits. Essentially, you would have to count this as income, and you would be no better off. Like everyone else mentioned above.

Unless there's some other mechanism about how this would save you money?
posted by Lemurrhea at 6:30 PM on November 18, 2013

I am a pastor and reside in a church-owned parsonage, and even I still pay taxes on the fair rental value of the house.
posted by 4ster at 6:32 PM on November 18, 2013 [2 favorites]

If you're trying to pay for things with pre-tax income, look into programs that let you do this with travel expenses. Programs exist that let you pay for gas or public transportation with pre-tax income.
posted by griphus at 6:33 PM on November 18, 2013

There are some very limited exceptions (they'd have to own the place, you would have to be required to live there as a condition of the job and it would have to be to the benefit of the employer for you to live there.

Well, I did that. My employer paid a few bills every month and didn't charge me rent while I was living in her building and working for her. I asked her about the tax issues, and she said it was considered barter. She had a pretty big operation going, so I figured it was on the up and up?

Some things that came up for me: for all intents and purposes that "income" doesn't exist according to the IRS, which could cut into credits like the EIC and leaves you with a smaller refund. I'm uptight, so it also bothered me that my income was getting "under-counted" for things like SS. Small paystubs can also be a problem in terms of some contracts, like for credit cards...or for a new apartment. So if things go south with your job, be careful, because they're literally paying for your housing and it's going to be hard to get a new apartment with deflated pay stubs.
posted by rue72 at 6:53 PM on November 18, 2013

I asked her about the tax issues, and she said it was considered barter.

IRS Tax Topic 420, Bartering Income states that barter is taxable, so that's really a non sequitur with regards to deciding whether such an arrangement is legal.
posted by grouse at 7:08 PM on November 18, 2013 [1 favorite]

Barter income is, per the IRS, also taxable income, so no, it wasn't considered barter, but it may have fallen into the exception category as mentioned.

But yeah, basically, your expenses are not business expenses for the company. It's only business expenses for the company if it's for the company. Broadly speaking, if they're paying for something for your benefit and not theirs, it's just the same as them paying you, unless the IRS has specifically said that it's a tax-free benefit. It has to specifically be designated tax-free to be so, otherwise it defaults to being taxable income no matter what they pay you in--rent payments or cash or shiny beads.
posted by Sequence at 7:10 PM on November 18, 2013

If you are in Canada and you can swing it such that instead of getting your rent paid you receive a living out allowance then your living out allowance is tax free. It requires you have a residence away from your work location but the LOA can be significantly greater than what a frugal person will expend while away from their residence. It also requires that the location be temporary though temporary in this case can mean several years.
posted by Mitheral at 7:17 PM on November 18, 2013

There is a downside though as LOA does not count as income so doesn't effect EI calculation of CPP payments. It's not uncommon for someone to have under the tabled a bunch of their compensation to get screwed on disability and pension payments.
posted by Mitheral at 7:19 PM on November 18, 2013

In case any of the above is unclear: Yes, it is probably legal for your employer to pay your rent. However, if that were to happen, you would legally be responsible for the taxes on that payment.
posted by jaguar at 9:51 PM on November 18, 2013

Yeah, it's a fringe benefit.

In Australia at least, there is such a thing as "salary sacrificing", which you can use to get things like cars, computers, travel etc paid for out of your pre-tax salary. But whether you then have to pay tax on it as a fringe benefit depends on how much you use that thing for your job, and how much the actual amount it cost is. If you have some similar option in the US, then I imagine that being able to do this with rent would become more likely if you work from home, have a home office, or have to live in a very specific place with higher rent than you would otherwise pay due to your job.
posted by lollusc at 11:54 PM on November 18, 2013

In the UK Salary sacrifice generally works by lowering your taxable income.
You pay tax on the benefits but not National Insurance, so you and the company both save.

For example Pension Contributions are treated as a benefit and your official salary is lowered by the same amount. You pay tax on the benefits, but NI is still calculated on your salary, which is a bit lower.
posted by Just this guy, y'know at 2:25 AM on November 19, 2013

It's still income, of one sort or another; while this idea might reduce your per-paycheck withholdings, it wouldn't make any difference in your total annual tax debt. And reducing your per-paycheck withholdings by that much could leave you with a honking big "amount owed" on your tax returns come next April.
posted by easily confused at 2:35 AM on November 19, 2013

Generally, the only time employer-provided lodging would be excluded from the employee's taxable income is if it is "for the convenience of the employer" (a very narrow legal term of art), is on the employer's premises, and is required to be accepted as a condition of employment. An option to receive compensation in lieu of lodging makes the lodging taxable income to the employee.

This is actually one of the first issues litigated under the modern-day US tax code.

Unless you're in the business of inventing novel financial instruments, any "tax loophole" you think you've ingeniously come up with has already been found, tested, and closed. As a wage earner, your only real tax-saving strategies are: buy a house, have kids, save for your retirement, donate to charity, start a small business, have employer-provided healthcare.
posted by melissasaurus at 7:52 AM on November 19, 2013 [2 favorites]

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