Daycare benefit

[ncdaycare]

This is probably more of a tax question than a labor law question, but perhaps someone can answer anyway, since it deals with benefits given to employees. When my wife worked for a daycare center, the amount that they discounted her daycare (80% off) was taxable as a childcare benefit and she received a statement each year showing the value of the benefit to file taxes on. I assume the company wrote the amount discounted off their taxes as an operating loss.

Now that we are in the process of purchasing a daycare center, we wanted to try to clarify if the discounted amount of the daycare for our employees must be reported as a benefit to them, and they have to file on their taxes the amount of the benefit received. Can anyone clarify if that discount is required to be reported as a benefit?

[Pattymd]

The employer may offer free services to its employees without including the fair market value of those services in the employees' income if the following conditions are met:

1. The free service is one that is regularly offered for sale to customers in the normal course of the employer's "line of business" in which the employee works.

2. The employer bears no substantial additional cost (including lost revenue and additional labor) in providing the service to the employee.

3. The service is available on equal terms to each member of a agroup of employees whose classificaiton does not discriminate in favor of highly compensated employees.


An employer may offer discounted goods or services to its employees without adding the fair market value of the discounts to the employees' income if the following conditions are met:

1. The discount on services cannot exceed 20% of the price at which the services are offered to customers. If the discount exceeds 20%, the excess is taxable income to the employee. (For discounts on goods, the threshhold is the gross profit percentage.)

2. The goods or services must be offered for sale to customers in the employer's line of business in which the employee normally works.

3. The discount is available on equal terms to each member of a group of employees whose classification does not discriminate in favor of highly compensated employees.

This is all coverd in IRC Section 132 and related regulations.

[ncdaycare]

Thanks for the reply! A couple of things to clarify, if I may ask:

1) Does offering a discount structure of (for example) 50% to hourly associates, 75% to Asst. Director and 100% to the director considered "discriminate(ing) in favor of highly compensated employees"? (I can't imagine anyone would call a director of a daycare "highly compensated." ) The center my wife worked at had a similar structure, just want to make sure that type is acceptable.

2) "The employer bears no substantial additional cost (including lost revenue and additional labor) in providing the service to the employee." Daycares must operate within a strict teacher/student ratio. Giving a spot to an employee for free or even discounted does create a loss of revenue and requires additional labor and other expenses, so I am interpreting this to mean the benefit should be reported as taxable. Would you agree with that assumption?

This site is great...there is a tremendous amount of info here and people who seem willing to help others, which is unusual today. Thanks again.

[Pattymd]

Yes, I would agree with you on both. However, I would run this by your CPA or legal advisor.