Although most frequently used in the exployer-employee relationship, per diem allowances may be used in arrangements between any payor and payee, such as between independent contractors and those contracting with them. However, employees related to the payor under the related party rules of Code Sec. 267(b) (using a 10-percent common ownership standard) cannot use per diem substantiation methods.
Employees. The per diem method can be used to substantiate an employee's reimbursed expenses (for purposes of the employer's return) only if the reimbursement arrangement is an accountable plan and the allowance:
- is paid with respect to ordinary and necessary expenses incurred or that the employer reasonably expects to be incurred by an employee for lodging and/or M&IE while traveling away from home in connection with the performance of services as an employee;
- is reasonably calculated not to exceed the amount of the expense or the anticipated expenses; and
- is paid at the applicable federal per diem rate, a flat rate, or stated schedule.
- lodging plus M&IE, which provides a per diem allowance to cover lodging as well as meals and incidental expenses;
- M&IE only, which provides a per diem allowance for meals and incidental expenses only; and
- incidental expenses only, to be used when no meal or lodging expenses are incurred (Rev. Proc. 2011-47).
Expenses of laundry, lodging taxes, and telephone calls are not incidental expenses (IRS Pub. 463). Lodging taxes for travel within the continental United States and for nonforeign travel outside the continental United States are reimbursable miscellaneous expenses. However, lodging taxes have not been removed from the foreign per diem rates set by the U.S. State Department (41 C.F.R. 301-11.27).
Allowances Exceeding Federal Rates. If expenses are substantiated using a per diem amount, regardless of whether it covers lodging plus M&IE or only M&"IE, any reimbursement that exceeds the relevant federal per diem rates for that type of allowance must be included in the employee's (or independent contractor's) gross income. The excess portion is treated as paid under a nonaccountable plan, thus it must be reported on the employee's Form W-2 and is subject to withholding (Rev. § 1.62-2(h)(2)(i)(B)(1)).