Thursday, July 2, 2009

Per Diem

I have received many inquiries lately from clients regarding how Per Diem works and whether the Per Diem is taxable income to employees. This seems to be a question that causes a lot of confusion for many employers, as well as for employees. How does Per Diem work? Must it be substantiated (accounted for)?

Let me start first by explaining what Per Diem is. The IRS allows companies to reimburse employee business expenses using Per Diem rates (set annually by the IRS). There are different types of expense reimbursements that the IRS allows. Some of these reimbursements must be substantiated in order to receive the reimbursement. Other types of reimbursements do not have to be substantiated. Per Diem is a set amount the IRS allows for reimbursements that is TAX FREE income to the employee.

Per Diem rates are set by the IRS once per year, and are good for one year following the date the rates are set. Per Diem rates are good from October 1 through September 30. The Per Diem rates vary depending on location. Per Diem rates are made up of two parts: Lodging and Meals & Incidental Expenses (M&IE). The combined Lodging and M&IE rates are the maximum allowed Per Diem PER DAY for any given location. Locations are the continental United States (CONUS). Each state has its own specific Per Diem rate, with many states having additional rates assigned to specific cities and/or counties within the specific state. See IRS Publication 1542 for specific Per Diem rates.

There are maximum rates set for each of the two components that make up the total allowable Per Diem. Maximum rates for Lodging are separate from the maximum rates for M&IE. The two rates combined make up the total allowable Per Diem rate that can be used by an employer to reimburse expenses incurred by employees.

Using the IRS Per Diem rates to reimburse expenses is probably the easiest way for employers to reimburse employees for business-related travel expenses, since these expenses do NOT have to be substantiated. However, an employer should not use the Per Diem method to reimburse employees if there is reason to believe that an employee did not truly incur Lodging and/or M&IE expenses. In this case, the employer should implement an ACCOUNTABLE PLAN that is used company-wide for ALL employees.

Under an ACCOUNTABLE PLAN, an employee MUST provide written evidence of ALL expenses incurred (i.e., receipts for ALL expenses, along with an explanation of what the expense is for, including such information as the business purpose for the expense, who was present (employee, client, etc.), date and location of the expense). The employer may provide an employee with advance payment for anticipated expenses, however, the employee MUST substantiate all expenses within a reasonable time, and the employee MUST return any excess reimbursement to the employer. If the employee does not return excess reimbursements to the employer, the employer is required to consider this as taxable income to the employee (subject to all employment taxes).

There is another reimbursement plan available to employers, called an UNACCOUNTABLE PLAN. Under an UNACCOUNTABLE PLAN, different rules apply. This article does not cover the rules and requirements which apply to UNACCOUNTABLE PLANS.

To wrap up, employers who reimburse employees using IRS Per Diem rates may do so without having to substantiate the expenses (as outlined above). Per Diem reimbursements are TAX FREE to the employee, provided the employer does not reimburse employees more than the allowable Per Diem rates published in IRS Publication 1542. If an employer reimburses an employee more than the allowable Per Diem, the excess amount MUST be included as taxable income to the employee, subject to all employment taxes.

48 comments:

David said...

I am trying to account for per-diem expenses in my small business accounting software. My accountant mentioned to me that expense charges should be against an asset account, not a cash account. Can someone give me a suggestion of an account to use & account parameters?

Kenneth Reid said...

David,

There are many ways to account for the Per Diem. I would ask your accountant for his input on how he would like to see this information. Work with your accountant - especially if he also prepares your taxes. This is the best way to handle this situation (in my opinion).

Tyler said...

So when doing rough, "ball-park" estimates on cost for a project, is Per Diem pay subject to payroll, social security, disability taxes from the employer side?

Kenneth Reid said...

Tyler,
Per Diem is not taxable income to employees provided the Per Diem is not more than the Federal Per Diem rates that are published annually (on the IRS.gov website). Per Diem is not subject to any employment taxes on the employer side, unless the Per Diem paid to an employee is more than the published rates (mentioned above). It is best if an employer has an accountable plan, and requires substantiation for all expenses related to the Per Diem (reimbursement). Go to the IRS.gov website and look up Per Diem. Read the rules and regulations related to Per Diem payments, and how they should be applied.

Per Diem rates vary by location, and sometimes by the time of year.

Tan said...

I appreciate your blog. I'm working on something similar to this in the current week, and your description helps.

cd6e8e68-fa86-11e0-9e9f-000bcdcb471e said...

Can an employer use a per diem rate for some employees and have an accountable plan for other? Some of our employee travel extensively between our 2 offices and it would be easier to give them a flat per diem. Other employees travel less frequently and their expenses are usually billable back to our clients so receipts are required.

Kenneth Reid said...

It would be better to treat all employees the same. If you are going to pay per diem for some employees, you should do the same for all employees. If you need employees to provide receipts (to be billable to clients), you need to do this for all employees. You need to be consistent with ALL of your employees. You can still require your employees to provide receipts for all expenses incurred when they travel even if they are given per diem to cover their expenses.

If the IRS were to audit your company, they (the IRS) might disallow the per diem paid to certain employees (and not to other employees). The reason for this is consistency. The IRS expects you to be consistent in how you reimburse expenses to your employees, whether it is an accountable plan or if you use per diem. There are certain instances when employees must substantiate expenses, even though the company is using per diem to cover travel expenses.

If employees are reimbursed for expenses under a non-accountable plan (wherein the employee does not have to turn in receipts to prove actual expenses), those reimbursements would be taxable to the employee. Per diem is normally not taxable income to employees. Reimbursements made to employees under an accountable plan (where expenses must be substantiated and backed up with receipts) are not taxable income to employees.

Lori Martin said...

My husband is OTR driver. The company pays all drivers $150 every week. On his W2, there is no amount entered in box 14.

Are we required to include the amount as gross income when we are applying for a loan?

Also, is there any IRS publication or 'rule' that indicates how per diem should be handled by loan companies?

Kenneth Reid said...

Lori,

Per Deim is not reported on an employee's W-2. It is tax free to the employee, unless the employer is paying a higher rate of per diem than allowed by the federal government, in which case, the excess per diem is considered to be income to the employee.

To my knowledge, you are not required to include per diem payments as part of gross income. Per diem is usually a non-taxable "fringe benefit" except as noted above.

The IRS does not provide information on how loan companies should handle per diem. Per diem should not be considered as part of your husband's income outside of what is reported on his W-2.

Digger said...

I appreciate that you are sharing your expertise here.

I am the majority shareholder in an S-Corporation. When I travel, the company reimburses me for my travel expenses, to include those related to mileage, meals, and lodging. The company has an accountable plan, as outlined in your great article above.

In particular, the company reimburses me for my business travel-related meal and lodging expenses by paying me the respective federal per diem rates based on the location I spend the night in.

Sometimes I spend less than the per diem rates allow for. For instance, on a recent trip to Denver, CO, in October 2012, I spent two days and nights there. After I returned from the trip (the company never pays travel advances, by the way), the company reimbursed me $132 for meals and incidental expenses (the federal per diem rate for M&IE is $66/day for Denver) and $298 for lodging expenses (the federal per diem rate for lodging being $149/day for Denver).

However, my actual meal expenses for those two days and nights in Denver were $98.12 and my actual lodging expenses for that same period in Denver were $263.20.

Three questions:

1. Am I obligated to return the "excess" M&IE and lodging per diem payments to the company?

2. If the answer to question #1 is "no," is the company then obligated to report said "excess" reimbursements as income on my W-2?

3. If the answers to questions #1 and #2 are both "no," am I then obligated to report said "excess" reimbursements as income on my personal tax return?

Thank you for your time!

Kenneth Reid said...

Digger,

Since your company has an accountable plan, the company should only be reimbursing you for the actual expenses you report, even though the company is using the federal "per diem" rates. If the company reimburses you the full "per diem" rate, and this amount is more than your actual expenses, the excess should be included on your W-2 as taxable wages.

You are not obligated to return the excess, however, the company would be obligated to report the excess as income on your W-2 because the excess was more than you reported as actual expenses (under the accountable plan).

Gary Adkins said...

I operate my photography business as a DBA. On occasion, another photographer subcontracts work to my business. It involves travel. He pays me a per diem (for overnight trips), and 0.25 per mile. I show my actual expenses of hotel, meals, gas etc as a normal business expense. When I invoice him, what are the proper accounting entries? He does not exceed the IRS regulations in either case so I don't think my business has to consider any of either as income however, I have to present him an invoice showing those as line items.

Kenneth Reid said...

Gary,

I think this may be a problem. Once the other photographer pays you a per diem and mileage, I think this creates an employee/employer situation and not an independent contractor situation. The invoice should simply show a total fee for the job without any reference to a per diem or a mileage reimbursement. The proper accounting entrt is to show the full amount as income and then deduct the actual expenses in the proper category in the tax return.

Raquel Rodriguez said...

Hi Kenneth, I appreciate your blog with all the info you've provided!
I have a concern/question in regards to the “Per Diem” rates that are set by the federal government for each state. I work as a Wind Turbine Technician as a travel tech. My company pays me a certain amount (tax free) per day (per diem) for the lodging and meals. Now, according to the rates on the (IRS.gov website), I wasn’t receiving that amount. I was receiving less. Every State is different; some are cheaper to live in, others not so much. With that being said, “Am I supposed to receive the difference from government rate and my actual amount?” I’m just confused in this area. Not sure how I would report this or how to go about it. I was told by two of my fellow employees that I’m entitled to amounts not actually received for every day for each state. Is this true?

Kenneth Reid said...

Raquel, your company has the option to pay a lesser per diem rate than the rates published on the IRS website. If your employer pays a higher per diem rate than published on the IRS website, the additional amount is taxable income to you. Since your employer is paying less than the IRS' published rate, you would not be able to claim the difference unless your company has an "accountable plan" and they are not paying you the full amount of expenses you turn in (with receipts). If this is the case, the additional amount of expenses that are not reimbursed to you are deductible on your 104 tax return, using Form 2106 (and is subject to the 2% of income threshold).

Raquel Rodriguez said...

Thank you so much for your response Kenneth! I will make sure to spread the word about your blog and your services! :-)

j thomson said...

Hi Kenneth, Like Raquel I am a traveling power industry worker. I worked for 2 companies that paid me per diem in 2012.
Neither company required accounting of expenses or payment of money not spent. The w-2s both did not include these payments as wages received.
however one employer described the payment of this item on the pay stubs each week as 'reimbursable'. The other employer described it as per diem.Does this variance in descriptive terminology have any tax consequences for me?
Also, as an employee is this per diem completely non taxable and how should I enter this on my tax return....if at all?
Can I still claim travel expenses for my car mileage and living expenses for these 2 jobs ...only deducting those amounts in excess of per diem? Thanks so much for your time .
Best Regards, Jeff Thomson

Kenneth Reid said...

Jeff, it depends on where this information is on your W-2s, and what code(s) are entered. Without seeing the W-2s, I cannot provide more information. You cannot claim "living" expenses, as these are covered by the per diem payments received. You also cannot claim the mileage expense, as this is also covered under the per diem received.

Alicia Templin said...

Hi Kenneth, my husband works in houston and we live in DAllas. He gets a 1099 form and gets paid per day.HE works there 2 weeks, uses his car. how does the per diem work? He spends $50 per day in meals and get $250 per day for his labor. it means he needs to report income of $200 only? his 1099 form from 2012 shows the whole amount of $250 per day. Please advise me, we do not want to do anything incorrect.

Kenneth Reid said...

Alicia, your husband must claim the full amount shown on the Form 1099. Regarding meals (and possible mileage), I don't have enough information to provide you with a proper answer. Does your husband stay overnight while in Dallas? If so, you did not mention this fact. If not, the meals are most likely not deductible. If your husband only commutes back and forth between Houston and Dallas, the mileage is not deductible. If your husband uses his car while working in Dallas (business mileage), this mileage might be deductible, provided he keeps a mileage log which shows business mileage, the date, and purpose.

Shawn Cushen said...

Hi, Kenneth. I am an RN. I am going to accept a 13-week contract to work for a hospital in a rural Alaska town. The hospital will provide my housing. The meals and incidentals per diem rate for that town is $132 per day combined. I will work 3 to 4 12-hour shifts per week and will receive a 1099-MISC for my earnings from the recruiting agency that contracts me.

1. Must I substantiate my meal and incidental charges, or can I automatically deduct the $132/day allowed?

2. Since I must remain in the town on days that I do not work, can my deductions for meals and incidentals also be taken on the days that do not work?

Thanks....

Kenneth Reid said...

Shawn,

The per Diem rate of AK is $123 not $132. Per Diem is usually the defined benefit rate for reimbursement purposes by an employer (based on the Fed rates), and includes 3 meals, hotel, and incidentals. Since the employer is providing the housing, the M&I (Meals and Incidentals) for AK are at $53.25 (2012 rates). Since travel between your home and the temp assignment is only at the beginning and end of the assignment, you can continue to deduct the M&I for weekends.

You can look up the Fed per diem rates on the GSA website. You can take the deduction of the per Diem M & I rate for your temp job assignment, on Form 2106, line 3, rather than have to maintain all of the receipts. The only documentation that you will need to keep is documentation of the dates that you were on your temporary assignment (and that can be from the temp agency or from your payroll stubs).

Jeff Wren said...

Hi,
My wife is non-employee payee.
On 1099-Misc, the payer shows entire amount paid, then sends a memo that X-amount of that is Travel/Hotel. Not shown but calculated out by me is X-amount Per Diem.

I am presuming the Travel/Hotel is broken out because it should not be included as taxable income, and from what I am reading Per Diem is not taxable either.

So if I reduce her income by these amounts that is a great tax impact. But, I am sure there must be a separate form or area on our return where these two figures have to be accounted for--to match the Box 7 total--or else it would raise a red flag to IRS?

Comments or assistance welcome!

Thanks,
Jeff

Kenneth Reid said...

Jeff,

I would not assume that the per diem is included in your wife's income. I would check with the company that issued the 1099 and ask them if they included per diem in the Box 7 wages. It should not have been included in her wages.

If it was included in her wages, request a corrected 1099, and file an extension.

Jayson Haskell said...

Hey Jeff,

Quick question for you, I am a construction superintendent. I just started with a new company here in California. I am getting $25.00 a day per diem (lowest I have ever got) and a $135.00 a week truck allowance. The past companies that I have worked for have never taxed me on my per diem or my truck allowance. They are paying for my hotel.
My new company is taxing me on both the per diem and truck allowance. i was under the impression that these two items were not taxable.
If they are not taxable, what resource can i show them to back up my argument that they are not taxable?

Kenneth Reid said...

Jason, is the comp0any taking out state or federal taxes? You did not specify.

It sounds more like the company is providing you with payroll advances for your food and vehicle expenses instead of per diem payments for food. The vehicle allowance is an advance for vehicle expenses, again, not per diem (or under the vehicle travel allowance allowed by the IRS).

It sounds to me more like your company is providing these payments as "advanced pay" for expenses, and there is not an accountable plan in place, which is why you are taxed on these items. Check with your company as to why they are taxing you on these items. Find out of they the company expects you to submit expense reports for meals and vehicle expenses.

Just because you work for a construction company does not mean that meals and vehicle expenses are "per diem". Per diem is usually only applicable in situations where an employee is away from their normal "tax home" or place of employment (i.e., you travel out of town and spend the night because of the distance traveled).

If you have further questions, go to the IRS website at IRS.gov and search for per diem and travel expenses.

Monica said...

Hi,

I would like to know about meal per diems for spouses and children.
1 - Can they only be given if they are required to attend?
2 - Would their per diems be half of that an employee receives?
3 - My assumption is that there is no law on it but is there maybe a 'best practice' when instituting a company policy?
4 - The real question then is, would per diems to spouses (and children) be taxable? (put on employees W2?)

Thank you!

Kenneth Reid said...

Monica,

Per diem is not allowed for spouse or children under any circumstances. If an employer pays any kind of "per diem" for an employees spouse and/or children, the total amount of per diem paid for the spouse and/or children is taxable income to the employee, subject to ALL employment taxes, including all state payroll-related taxes

Monica said...

Thank you Kenneth, very helpful!

What IRS publication or place is it that I can refer to, to prove that if a per diem is given to a spouse or child it would be taxable to the employee?

Kenneth Reid said...

Monica,

Look up Rev. Proc. 2008-41 (on the IRS website. You want to take a look at Section 3.01(1) specifically. There it clearly states that this a plan applicable to employees. Since a spouse and children are not employees, they are not entitled to a per diem payment. If an employer is subsidizing their costs, it becomes income to the employee.

robert madden said...

hello I drove over the road for a company that paid me half the year 1099 the other half of the year 1040..while being paid as a 1040 the company took part of my earnings and gave it back to me as payment in per diem.if I had paid any money towards repairs to the company truck.I was reimbursed at the end of the trip as long as I turned in receipts. I have worked on other jobs that paid per diem plus my earnings. Question 1:shouldnt I have been paid per diem as a 1099 also? Question 2:why is per diem averaged in with my earings on my w2s if its not taxable? Thanx in advance Trucker Rob

Kenneth Reid said...

Robert,

Every companies do things in their own way. I cannot answer your question based on the information you provided. Companies are not required to pay per diem, neither are they required to reimburse employee expenses to you, whether or not you submit receipts to the company. Each company is different, and they each do things differently. I cannot speak for any company as to why they do (or did) things in any specific way. I don't know anything about the company (or companies) you referenced, and I do not want to provide erroneous information to you.

I would suggest you check out the IRS website, and do a search for "Per Diem." The IRS has lots of good information regarding Per Diem and how it is supposed to work. Per Diem is somewhat different for the trucking industry compared to most other industries. I am not that familiar with the differences in the rules as they relate and apply to the trucking industry.

Janet Campbell said...

My boyfriend works as a contractor for a Chemical Plant. He was recently sent out of state with him company to work at another Plant. They are giving him a Per Diem but it will be placed on his paycheck. Why is this and how can he claim this back when he files his taxes?

Kenneth Reid said...

Janet, If your boyfriend is truly a subcontractor (independent contractor), the per diem is added to his pay and will be included on the 1099 at the end of the year. He should not "invoice" for the amount of the per diem received. He should include the per diem as an expense (meals, travel, hotel, etc.) based on the per diem rate he is receiving (and based on the IRS per diem rate for wherever he is working and receiving the per diem).

If your boyfriend is filing a Schedule C with his tax return, he might be limited to the amount of the per diem deduction allowed (on Form 2106). If he files for 1065, 1120 or 1120S, he should be able to claim the full amount of the per diem payment as an expense.

If your boyfriend is actually a receiving a "paycheck", the per diem will not be subject to taxes, and will not be included in taxable income (on the paycheck or on any W-2 received).

Lucas Phillips said...

Kenneth, I'm blown away by the knowledge you have on this blog. You know your stuff and it's so reassuring to people who are in dark about these complicated tax issues.

Here's my situation:
I work for a company in Maryland but I'm receiving per diem(7 days/week food & lodging-no receipts needed) for working FT in Virginia. Am I exempt from paying state taxes in VA? The VA-4 form states I'm exempt if: ...(d) You are a domiciliary or legal resident of Maryland, Pennsylvania or West Virginia whose only Virginia source income is from salaries and wages and such salaries and wages are subject to income taxation by your state of domicile.

Thank you for your time and wealth of knowledge.

Kenneth Reid said...

Lucas,

I am not familiar with VA law with regard to income taxes. I would have to say that, in your situation, it would depend on how your employer is paying the per diem to you. It sounds like your employer is paying the per diem to you without any type of accountable plan being in place. I cannot answer your question as to whether this would be considered as taxable income in VA. You should probably check with your own accountant or tax preparer, or perhaps see an accountant or tax preparer (in VA) and get their opinion.

Lucas Phillips said...

Thank you for the info Kenneth. Much appreciated!!

Lane Dorn said...

Kieth,
I am recieving per diem non-taxed
as my contract is less than a year long .
My employer has it listed in my pay stub as non taxed however the payment showes up on my year to date gross wages .The rate is $45 a day less than IRS limit.
My question is will I still get taxed on this payment since it showes up as my gross YTD income ??

Kenneth Reid said...

You should not be taxed on it at the federal level, however, you might be taxed on it at the state level.

Jan Ess said...

My husband worked in tennessee for $100 per dium per day (flat rate). He started in May 2012. We (and evidently his employer) were unaware of the tax (we're being told) on per dium after one year. My husband's job finished the end of October 2013. His employer just notified him that he owes $5,500+. The employer said they will front the money and we can repay them.

Our questions are 1) Is this an actual tax law? And is it roughly 35% as the employer tells us? 2) Do we owe this?

As a side note, if my husband had been told about the tax (and started to receive less per dium, my husband would not have stayed in tennessee. The new amount of approximately $65/day per dium (after taxes) is not enough to cover lodging and food.

Thanks so much!

Jan Ess said...

My husband worked in tennessee for $100 per dium per day (flat rate). He started in May 2012. We (and evidently his employer) were unaware of the tax (we're being told) on per dium after one year. My husband's job finished the end of October 2013. His employer just notified him that he owes $5,500+. The employer said they will front the money and we can repay them.

Our questions are 1) Is this an actual tax law? And is it roughly 35% as the employer tells us? 2) Do we owe this?

As a side note, if my husband had been told about the tax (and started to receive less per dium, my husband would not have stayed in tennessee. The new amount of approximately $65/day per dium (after taxes) is not enough to cover lodging and food.

Thanks so much!

Kenneth Reid said...

Jan,

In order for me to provide an accurate answer to your questions, I would have to do a good bit of research in order to find case law and/or other government guidance on this issue. This research would incur a considerable cost and would require a $300 deposit from you. I would not be able to start this project without a signed engagement letter and the deposit mentioned above.

Yosef Ortiz said...

Hi Kenneth,

My company does contracted work for the Navy, Marines, etc (under federal contracts) and receives the lodging and per diem rates as outlined in the IRS/GSA guidelines. However, they only provide us with $30 and the lodging is done putting us in same hotel rooms (even though they get paid for "room per person").

My question is; if they decide to pay a lesser amount I suppose they are then obligated to report the amount they keep as taxable income for the company and not as tax exempt "business expenses" (Btw, they keep approximately 50-70% of the amount per person)

We cannot possibly have reasonable meals with $30 per day, plus take care of our other expenses (i.e.laundry expenses) We have even tried to give the employer receipts and they say it is our problem that we spend more than the $30 per day on food or other expenses (even when we stay the weekend, but do not get the $30)

Any comments on this?

Thanks,

Yosef

Kenneth Reid said...

Yosef,

Your only option here is to keep your receipts, keep notes on what you actually received (per diem / reimbursements), and report the rest as "unreimbursed employee expenses" on Schedule A (subject to the 2% AGI limitation).

You could also file a complaint with the IRS and/or DOL, however, you would have to be able to prove your case. Although there are laws to supposedly protect employees (who "blow the whistle') from retaliation from employers, this does not mean that your employer won't retaliate against you (such as firing you, or demoting you, or whatever).

Jennifer Boyd said...

Kenneth,
So glad I found your blog. My husband travels alot with his company. He has a company truck, and company credit card that pays for gas, and lodging. He also gets a flat rate of $45.00 a day per diem for M&IE. He doesnt have to turn in receipts for the M&IE. We noticed that they are including his per diem as part of his gross income, and are taxing him on it. Does this sound right? The other companies hes worked for have always given a seperate check for per diem, with no taxes taken out.
Do we need to bring this to their attention, or are they doing the right thing?

Kenneth Reid said...

Jennifer, Please read the post carefully, and go to the IRS website and look up the IRS publication(s)noted in my post. Per Diem payments may or may not be taxable, depending upon specific circumstances. The publication(s) I mention in my post go into the specific details as to what and when Per Diem payments may be taxable.

Justin Worthington said...

My company pays $50 a day per diem for lodging and food when working out of town, but only if you work for 4 hours or more. Even when required to stay on weekends when dot won't let us work or we can't work for a different reason. It is hard to find a hotel for under $50 a night let alone get breakfast lunch and dinner out of it too. I have spent hundreds of dollars if not more out of pocket on hotels and food when traveling. They provide pickup truck and gas card but nothing else the $50 is supposed to cover my hotel room and food but it doesnt even come close. I am tired of paying out of pocket just to work and would like the money iv paid returned. I have receipts, bank, statements , and pay stubs to prove. Is there anything i can do? Turn them in to the IRS or DOL anything? Would a lawyer help. I just dont know what to do. And i am getting tired of going well do i pay my bills or pay for a hotel room so i can work. I dont make that much an hour either way under what i should for tje tupe of work i do

Kenneth Reid said...

Justin, I understand your frustration. However, I cannot provide you with legal advice, or other advice as to what you should do with regard to your situation. I would suggest you contact an attorney (competent in labor laws) to see what they might suggest. I cannot say that contacting the IRS or the DOL is the right thing to do, although it might be possible that you could or should contact both agencies. A lawyer should be able to give you better direction in this area.