Per Diem Rules
If you or your employees travel for business, it might be beneficial to implement a qualified per diem plan. Rather than reimbursing for actual expenses, an employer can provide a per diem amount based on IRS approved rates. One of the major benefits of the per diem method is the more lenient recordkeeping – employees typically are not required to keep receipts. Instead, a company simply pays the allowance to the employee. In addition, qualified per diem reimbursements generally are not subject to income or payroll tax withholding and are not reported on an employee’s W-2. It is also a good way to control travel and entertainment expenses.
The per diem rates are broken down into two categories: meals and incidental expenses (M&IE) and lodging. The rules state that employers can provide per diem that covers lodging and M&IE or M&IE only. The rates are adjusted on an annual basis and vary by location. The following website includes the most recent approved rates: https://www.gsa.gov/travel/plan-book/per-diem-rates/.
However, merely implementing a per diem plan does not make it qualified and thus tax-free to employees. Failure to properly administer the plan can have adverse tax implications for both employees and employers. The following should be taken into consideration when implementing a qualified per diem plan:
- Travel expenses must be ordinary and necessary business expenses.
- Employees must travel a sufficient distance from home. A general rule of thumb is greater than 50 miles and for at least 12 hours; but less than one year.
- Accurate records must still be maintained. Even though the record keeping requirements are more relaxed, employees must keep a log tracking the days worked away from home and provide it to the employer.
- Do not provide allowances in excess of the IRS approved rates. Any amount over the approved rate will be classified as taxable income to the employee and reported on their W-2.
- Per diems cannot be used as a salary alternative. Salaries should be determined based on industry specific and local data, not on if an employee receives a per diem.
If you are interested in implementing a qualified per diem plan and would like more information, please contact your local tax experts at BA Harris.
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