Randy is the manager of a motel. As a condition of his employment, Randy is required to live in a room on the premises so that he would be there in case of emergencies. Randy considered this a fringe benefit, since he would otherwise be required to pay $800 per month rent. The room that Randy occupied normally rented for $70 per night, or $2,100 per month. On average, 90% of the motel rooms were occupied. As a result of this rent-free use of a room, Randy is required to include in gross income.
a. $0
b. $800 per month.
c. $2,100 per month.
d. $1,890 ($2,100 x .90)

A) $0

Explanation:

Fringe benefits are usually included in gross income (only certain exception apply) and the taxpayer must pay income taxes and the employer must pay employment taxes for them.

But Randy's free room is actually part of the exceptions that are not taxed since it is a working condition that benefits him, but he only uses that benefit for business purposes. In other words, as long as Randy stays in that room, he will be available for work. This is something similar to what happens with a lounge room in a hospital where medical personnel can stay.

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