A per diem allowance for meal and incidental expenses (M&IE) only may be used to substantiate an employee's or other payee's M&IEs for purposes of the employer's return (Rev. Proc. 2011-47). The amount that is deemed substantiated is equal to the lesser of the per diem allowance or the amount computed at the federal M"&IE rate for the locality of travel for the period that the employee is away from home. If M&IEs are substantiated using a per diem allowance, the entire amount is treated as a food and beverage expense subject to the 50-percent limitation on meal and entertainment expenses.
The M&IE rate must be prorated for partial days of travel away from home. If an employee's meals are provided by the employer, even though the employee may be working from home, the employee is entitled to deduct only the incidental expense portion of the applicable federal per deim M&IE rates (R.J. Zbylut, Dec. 57,348(M), 95 TCM 1172 (2008)).
Self-Employed Persons and Employees. Self-employed individuals and employees whose expenses are not reimbursed may also use the M&IE-only rate to substantiate M&IEs while traveling away from home. The taxpayer must actually prove through adequate records or sufficient corroborative evidence the time, place, and business purpose of the travel, and lodging costs.
Optional Method for Incidental-Expense-Only Deduction. Taxpayers may use an optional method to deduct only incidental expenses in lieu of using actual expenses. Taxpayers who do not incur any meal expenses may deduct $5 per calendar day (or partial day) as ordinary and necessary incidental expenses, paid or incurred, while traveling to any localities within the continental United States (CONUS) or outside the continental United States (OCONUS) (Notice 2017-54, Notice 2016-58). The optional method is subject to the proration rules for partial days and substantiation requirements for taxpayers who use the per diem method for substantiation (Rev. Proc. 2011-47). The optional method for incidental expenses only cannot also be used by taxpayers who use the lodging plus M&IE per diem method, the M&IE-only method, or the high-low method and the optional M&IE-only mnethod
Transportation Workers. The M&IE rates for travel awy from home on or after October 1, 2017, for both self-employed persons and employees in the transportation industry are $63 for CONUS localities and $68 for OCONUS localities. The M&IE rates for travel away from home on or after October 1, 2016, for both self-employed persons and employees in the transpotation industry are $63 for CONUS localities and $68 for OCONUS localities (Notice 2017-54, Notice 2016-58). An individual is in the transportation industry only if the individual's work: (1) directly involves moving people or goods by airplane, barge, bus, ship, train, or truck; and (2) regularly requires travel away from home that involves travel to localities with differing federal M&IE rates during a single trip.
Under a calendar-year convention for the transportation industry, taxpayers who used the federal M&IE rates during the first nine months of calendar year2017 to substantiate an individual's travel expenses may not use the special transportation industry rates for that individual until January 1, 2018 (Rev. Proc. 2011-47). Likewise, taxpayers who used the special transportation industry rates for the first nine months of calendar year 2017 to substantiate an individual's travel expenses may not use the federal M&IE rates for that individual until January 1, 2018.
Showing posts with label Per Diem. Show all posts
Showing posts with label Per Diem. Show all posts
Monday, March 19, 2018
Per Diem Allowances for Lodging Plus Meals and Incidental Expenses (M&IE)
Under the lodging plus meals and incidental expenses (M&IE) per diem method, the amount of an employee's (or other payor's_ reimbursed expenses that is deemed substantiated (for purposes of the employer's return) is equal to the lesser of the employee's per diem allowance or the federal per diem amount for the locality of travel for the period in which the employee is awy from home (Rev. Proc. 2011-47). The employer is not required to provide lodging receipts if per diem allowances are used to substantiate such expenses. The locality of travel is the place where the employee stops for sleep or rest. Employees and self-employed individuals may determine their allowable deductions for reimbursed M&IE while away from home by using the applicable federal M&IE rate. However, unreimbursed lodging costs must be substantiated by required records.
Per Diem Rates. The federal per diem rate for lodging plus M&IE depends upon the locality or travel. For various geographic areas within the continental United States (the 48 contiguous states plus the District of Columbia) (CONUS), the federal per diem rate for a given locality is equal to the sum of a maximum lodging amount and the M&IE rate for that locality. There are also federal per diem rates for nonforeign localities outside of the continental United States (OCONUS), such as Alaska, Hawaii, Puerto Rico, and U.S. possessions. Rates are also established for foreign travel (foreign OCONUS).
Rates for CONUS, OCONUS, and foreign travel are published under the Federal Travel Regulations for government travel and are updated periodically (Rev. Proc. 2011-47). The travel rates are issued to coincide with the government's fiscal year of October to September.
High-Low Method. Instead of using the maximum per diem rates from the CONUS table, taxpayers can compute per diem allowances for travel within the continental United States under the high-low method, which is a simplified method for determining a lodging plus M&IE per diem. This ethod divides all CONUS localities into two categories: low-cost or high-cost localitiesa (Rev. Proc. 2011-47).
For travel on or after October 1, 2017, through September 30, 2018, the following per diem rates for lodging expenses and M&IE are used for high-cost and low-cost localities (Noltice 2017-54):
High-cost locality -- Lodging Expense Rate = $216; M&IE Rate = $68; Maximum per diem rate = $284
Low-cost locality -- Lodging Expense Rate = $134; M&IE Rate = $57; Maximum per diem rate = $191
For travel on or after October 1, 2016, through September 30, 2017, the following per diem rates for lodging expenses and M&IE are used for high-cost and lkow-cost localities (Notice 2016-58):
High-cost locality -- Lodging Expense Rate = $214; M&IE Rate = $68; Maximum per diem rate = $282
Low-cost locality -- Lodging Expense Rate = $132; M&IE Rate = $57; Maximum per diem rate = $189
Some areas are treated as high-cost during certain periods of the year (e.g., peak tourist season) and as low-cost during other periods. Thus, employers who use the high-low method must determine whether the employee traveled in a high-cost area and if the area was classified as high-cost during the actual period of travel.
If the high-low method is used for an employee, then the payor may not use the actual federal maximum per diem rates for that employee during the calendar year for travel within CONUS. For travel outside CONUS, the employer may use the applicable federal OCONUS rates, the M&IE-only rate, or reimbursement of actual expoenses.
Proration of M&IE Allwance. If an individual is traveling away from home for only a portion of the day, these are two alternative methods that may be used to prorate the per diem rate or the M&IE rate. Under the first method, 75 percent of the M&"IE rate (or the M&IE portion of the per diem rate) is allowed for each partial day during which an employee or self-employed individual is traveling on business. Under the second method, referred to as the reasonable business practice method, the M&IE rate may be prorated using any method that is consistently applied and in accordance with reasonable business practice. For example, if an employee travels from 9:00 a.m. one day until 5:00 p.m. the next day, a proration method that gives an amount equal to two times the M&IE rate is treated in accordance with reasonable business practice (Rev. Proc. 2011-47).
Transition Rates. Taxpayers may continue to use the per diem rates effective prior to October 1, 2017, for the remainder of 2017, or they may begin to use the new per diem rates for reimbursement for travel, as long as they use either the pre-October 1 rates or the updated rates for the October 1 through December 31 period consistently. Taxpayers who used the per diem method or the high-low substantiation method to reimburse travel expenses during the first nine months of calendar year 2017 must continue to use that method for the remainder of the calendar-year 2017. Taxpayers who use the high-low method during the first nine months of calendar-year 2017 may either continue to use the rates and localities in effect before October 1, 2017, or use the updated rates and localities in effect for travel on and after October 1, 2017, as long as they use the same rates and locations consistently for all employees reimbursed under the high-low method.
Per Diem Rates. The federal per diem rate for lodging plus M&IE depends upon the locality or travel. For various geographic areas within the continental United States (the 48 contiguous states plus the District of Columbia) (CONUS), the federal per diem rate for a given locality is equal to the sum of a maximum lodging amount and the M&IE rate for that locality. There are also federal per diem rates for nonforeign localities outside of the continental United States (OCONUS), such as Alaska, Hawaii, Puerto Rico, and U.S. possessions. Rates are also established for foreign travel (foreign OCONUS).
Rates for CONUS, OCONUS, and foreign travel are published under the Federal Travel Regulations for government travel and are updated periodically (Rev. Proc. 2011-47). The travel rates are issued to coincide with the government's fiscal year of October to September.
High-Low Method. Instead of using the maximum per diem rates from the CONUS table, taxpayers can compute per diem allowances for travel within the continental United States under the high-low method, which is a simplified method for determining a lodging plus M&IE per diem. This ethod divides all CONUS localities into two categories: low-cost or high-cost localitiesa (Rev. Proc. 2011-47).
For travel on or after October 1, 2017, through September 30, 2018, the following per diem rates for lodging expenses and M&IE are used for high-cost and low-cost localities (Noltice 2017-54):
High-cost locality -- Lodging Expense Rate = $216; M&IE Rate = $68; Maximum per diem rate = $284
Low-cost locality -- Lodging Expense Rate = $134; M&IE Rate = $57; Maximum per diem rate = $191
For travel on or after October 1, 2016, through September 30, 2017, the following per diem rates for lodging expenses and M&IE are used for high-cost and lkow-cost localities (Notice 2016-58):
High-cost locality -- Lodging Expense Rate = $214; M&IE Rate = $68; Maximum per diem rate = $282
Low-cost locality -- Lodging Expense Rate = $132; M&IE Rate = $57; Maximum per diem rate = $189
Some areas are treated as high-cost during certain periods of the year (e.g., peak tourist season) and as low-cost during other periods. Thus, employers who use the high-low method must determine whether the employee traveled in a high-cost area and if the area was classified as high-cost during the actual period of travel.
If the high-low method is used for an employee, then the payor may not use the actual federal maximum per diem rates for that employee during the calendar year for travel within CONUS. For travel outside CONUS, the employer may use the applicable federal OCONUS rates, the M&IE-only rate, or reimbursement of actual expoenses.
Proration of M&IE Allwance. If an individual is traveling away from home for only a portion of the day, these are two alternative methods that may be used to prorate the per diem rate or the M&IE rate. Under the first method, 75 percent of the M&"IE rate (or the M&IE portion of the per diem rate) is allowed for each partial day during which an employee or self-employed individual is traveling on business. Under the second method, referred to as the reasonable business practice method, the M&IE rate may be prorated using any method that is consistently applied and in accordance with reasonable business practice. For example, if an employee travels from 9:00 a.m. one day until 5:00 p.m. the next day, a proration method that gives an amount equal to two times the M&IE rate is treated in accordance with reasonable business practice (Rev. Proc. 2011-47).
Transition Rates. Taxpayers may continue to use the per diem rates effective prior to October 1, 2017, for the remainder of 2017, or they may begin to use the new per diem rates for reimbursement for travel, as long as they use either the pre-October 1 rates or the updated rates for the October 1 through December 31 period consistently. Taxpayers who used the per diem method or the high-low substantiation method to reimburse travel expenses during the first nine months of calendar year 2017 must continue to use that method for the remainder of the calendar-year 2017. Taxpayers who use the high-low method during the first nine months of calendar-year 2017 may either continue to use the rates and localities in effect before October 1, 2017, or use the updated rates and localities in effect for travel on and after October 1, 2017, as long as they use the same rates and locations consistently for all employees reimbursed under the high-low method.
Per Diem Methods for Substantiating Meals and Lodging Expenses
A taxpayer must substantiate the amount, time, place, and business purpose of expenses paid or incurred in traveling away from home. Although the taxpayer has the option of keeping the actual records or travel expenses, the IRS has provided per diem allowances under which the amount of meals and incidental expenses (M&IE) may be deemed to be substantiated. The per diem allowances eliminate the need for substantiating actual costs (Rev. Proc. 2011-47). A taxpayer who uses per diem allowances to calculate the deductible amount must still substantiate the time, place, and business purpose of the travel by adequate records or other evidence.
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:
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)).
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)).
Per Diem Allowances Subject to Withholding
If the amount of an employee's business expenses are substantiated through the use of an IRS-approved per diem allowance, any amounts paid by the employer to the employee exceeding the amounts deemed substantiated are treated as paid under a nonaccountable plan and subject to income tax withholding and other employment taxes (Reg. §§ 1.62-2(h)(2)(i)(B) and 31.3401(a)-4(b)(1)(ii)).
For per diem or mileage allowances paid in advance, withholding on any excess must occur no later than the first payroll period following the payroll period in which the expenses paid (i.e., the days or miles of travel) are substantiated by the employee. For a per diem or mileage allowance paid as a reimbursement, the excess amounts reimbursed are subject to withholding when paid.
For per diem or mileage allowances paid in advance, withholding on any excess must occur no later than the first payroll period following the payroll period in which the expenses paid (i.e., the days or miles of travel) are substantiated by the employee. For a per diem or mileage allowance paid as a reimbursement, the excess amounts reimbursed are subject to withholding when paid.
Thursday, September 28, 2017
IRS Notice 2017-54: 2017-2018 Special Per Diem Rates
Notice
2017-54 announces the special per diem rates effective October 1, 2017,
which taxpayers may use to substantiate the amount of expenses for lodging,
meals, and incidental expenses when traveling away from home. This notice
provides the special transportation industry rate, the rate for the incidental
expenses only deduction, and the rates and list of high-cost localities for
purposes of the high-low substantiation method.
Notice 2017-54 will be in IRB 2017-42, dated October 16, 2017.
Notice 2017-54 will be in IRB 2017-42, dated October 16, 2017.
Tuesday, August 8, 2017
PER DIEM RATES, CALCULATIONS AND DEDUCTIONS
City By City or Standard Daily Rate
There are two ways to calculate your per diem allowance -- standard daily rate
and city by city. Each has its advantages. Domestically, either method might yield
the best result however if you fly a lot of international pairings, city by city is
clearly the best option. Per diem rates are broken down into three parts- CONUS
(domestic), OCONUS (Alaska, Hawaii, US territories, etc.) and International.
Several per diem allowance rates exist, and it is important to choose the correct
one.
Per Diem Calculation
For example, Aspen (ASE) currently has a $288 per diem allowance (during ski
season of course), but this includes lodging which is typically paid for by the
airline. The amount associated with Meals and Incidentals Expense (M&IE) is only
$71 per night. This is using the city by city method. Conversely, the standard
daily rate for transportation workers is currently $63 for CONUS, and it changes
slightly for international / OCONUS destinations to $68 (this was recently
increased starting fiscal year 2016 which begins October 1 2015).
This allowance will automatically get adjusted to a 3/4-day for the beginning and
end of your trip, and your last overnight will be used to compute the per diem for
the last day of your trip. Regardless of what you have read in IRS Publication 463,
the Tax Court and industry practices automatically apply the 3/4-day convention
to the first and last day. Here are some examples:
Overnights City by City Per Diem
ASE, SFO, ORD $53.25 + $71 + $71 + $53.25 = $249
ASE, GRB, SFO $53.25 + $46 + $71 + $53.25 = $224
FAR, GRB, FSD $34.50 + $46 + $46 + $34.50 = $161
Standard Daily Per Diem
ASE, SFO, ORD $47 + $63 + $63 + $47 = $220
ASE, GRB, SFO $47 + $63 + $63 + $47 = $220
FAR, GRB, FSD $47 + $63 + $63 + $47 = $220
As you can see, each method has its advantages. If you fly to a lot of smaller
cities, generally speaking the standard daily rate is preferred versus a mix of
larger and smaller cities. If you fly internationally even occasionally, the city by
city method is generally preferred. Heck, LHR is over $180 per night. You can
only use one method for the entire tax year. In other words, you cannot switch
back and forth between pairings. We compute your per diem using both methods,
and use the per diem allowance with the greatest deduction.
Per Diem Deduction
Most domestic crewmembers who work an average of 15 days per month will
have a per diem allowance of around $9,000. Let’s say your airline reimburses
approximately $5,500. So the portion that is not reimbursed is $3,500. Because
you are Department of Transportation (DOT) employee, we multiply this number
by 80% (if you were not a DOT employee, it would be reduced by 50% instead
of 20%, so you got that going for you). Therefore your per diem deduction is
$2,800 (80% of $3,500) which at a tax rate of 15% equals $420 in your pocket.
International crewmembers can easily see a $10,000 deduction which is $1,500
in your pocket. Seniority is everything as they say.
Locals, Turns, Day Trips, CDOs, SDOs, Highspeeds
Questions come up all the time about two types of flying- ones that do not involve
an overnight, and ones that have overnights that are continuous or split duty.
The rule is simple - any time away from your tax home (domicile) that requires
SUBSTANTIAL rest is allowed for a non-taxable per diem reimbursement and
subsequent tax deduction. Substantial rest is not completed in the crew lounge
or FL350 - sorry. Having said that, resting in a hotel during a continuous or split
duty (CDO, SDO) overnight is considered substantial rest, and therefore a per
diem deduction is allowed. For example, if you do a single CDO/SDO it would be
3/4-day on the first and last day. If you do two CDOs/SDOs back to back, it would
be 3/4-day on the first day, full day on the second day and 3/4-day on the last
day. If you cannot get enough, read the famous Bissonnett Tax Court case
involving a ship Captain who did local trips, but was able to deduct per diem
expenses.
Thursday, July 21, 2011
IRS Discontinues High-Low Method for Substantiating Travel Expenses
On Tuesday, the IRS announced that it is discontinuing the high-low method for substantiating lodging, meal and incidental expenses incurred in traveling away from home (Announcement 2011-42). Last year, the IRS asked for comments on whether the high-low method was still needed, and it received no comments.
Under the high-low substantiation method, if an employer pays a per diem allowance in lieu of reimbursing actual lodging, meal and incidental expenses an employee incurs when traveling away from home, the amount of the expenses that is deemed substantiated (under IRC § 274(d)) for each calendar day is equal to the lesser of the per diem allowance for that day or the amount computed at the rate provided in an annual revenue procedure for the locality of travel for that day or partial day. This method was intended to be a simplified substantiation method to be used in place of the regular per diem substantiation method using the federal per diem rate.
The IRS has annually issued an updated per diem rate for travel to any specified “high-cost locality” or other locality within the continental United States. Under the high-low substantiation method, the high or low rate, as appropriate, applied as if it were the federal per diem rate for the locality of travel.
The IRS says it plans to publish a revenue procedure later this year that will provide general rules and procedures for substantiating travel expenses (omitting the high-low substantiation method). It will then no longer publish annual updates, but it will publish a new revenue procedure only when it modifies the rules and procedures. However, the IRS will continue publishing the special transportation industry per diem rate in an annual notice.
Under the high-low substantiation method, if an employer pays a per diem allowance in lieu of reimbursing actual lodging, meal and incidental expenses an employee incurs when traveling away from home, the amount of the expenses that is deemed substantiated (under IRC § 274(d)) for each calendar day is equal to the lesser of the per diem allowance for that day or the amount computed at the rate provided in an annual revenue procedure for the locality of travel for that day or partial day. This method was intended to be a simplified substantiation method to be used in place of the regular per diem substantiation method using the federal per diem rate.
The IRS has annually issued an updated per diem rate for travel to any specified “high-cost locality” or other locality within the continental United States. Under the high-low substantiation method, the high or low rate, as appropriate, applied as if it were the federal per diem rate for the locality of travel.
The IRS says it plans to publish a revenue procedure later this year that will provide general rules and procedures for substantiating travel expenses (omitting the high-low substantiation method). It will then no longer publish annual updates, but it will publish a new revenue procedure only when it modifies the rules and procedures. However, the IRS will continue publishing the special transportation industry per diem rate in an annual notice.
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.
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.
Subscribe to:
Posts (Atom)