There are so many details that go into running a business. The last thing any business owner or professional would want is for the IRS to examine their filed returns. An examination is an audit.
Even though less than 1% of tax returns get audited, you want to make sure your business falls within that other 99%.
Filing business taxes are typically more complicated than individual returns. That's because there are so many variables involved in the return process.
If you have employees who travel for business, you might be considering per diem allowances.
If so, do you know the tax rules for per diems? If you want to understand how taxes work for per diems, keep reading to learn all about it! Let’s dive in!
What are per diems?
In Latin, per diem translates to "for each day," or "per day."
When it comes to your employees, per diem is an allowance. It's paid to your employees to cover expenses like meals, lodging, and other incidental costs incurred during travel for work.
- The GSA (General Services Administration) establishes per diem laws every year for destinations within the lower 40 Contiguous United States. The State Department sets foreign rates for countries like France, Japan, and Canada.
- The DOD (Department of Defense) establishes non-foreign rates, like Alaska, Hawaii, and all other United States Territories.
What does a per diem cover?
Per diems, don't include your transportation to and from locations. As a business owner, you can make those travel arrangements for your employees. You can also let them book their travel and reimburse them later.
You can decide the per diems for your employees via two methods:
- For combined lodging and meal costs, there is a per diem rate.
- There's also a rate for meal costs on their own.
An employer can choose to use either method when they reimburse their employees' travel expenses. You can provide employees with per diem upfront, or you can reimburse your employees when they return. Upfront payment might come in the form of a company credit card or cash.
Here are some of the items that the IRS deems eligible for per diems:
- Room service
- Laundry (including dry cleaning and pressing clothes)
- Fees and tips for service providers (like food servers and baggage handlers)
A self-employed individual can only use per diem rates for meal costs.
Are per diem payments included in wages?
If the payment is equal to or less than the federal per diem rate, then per diem payments are NOT part of an employee's wages. Also, the employer must receive an expense report from the employee for each trip or expense.
The report must include details such as:
- The date and location of the trip
- The business purpose of the trip
- Receipts for lodging (if they're using the meals-only per diem rate)
The employee has to file the expense report within a reasonable period (usually 60 days). On failing to do so, the payment becomes taxable to the employee.
Is per diem taxable?
When any of the following situations are true, per diem payments are taxable to the employee:
- No expense report is filed with the employee's employer
- The expense report doesn't include vital information, such as the date, time, place, and business purpose
- The employee gets a flat amount (and therefore no expense report is required)
- Per diem gets paid over the allowable standard rate
For all of the above circumstances, per diem payments would be treated as wages, and taxes are due from the employer.
What if I pay more or less than the standard per diem rates?
Regardless of what the federal Per Diem rate is, you can still pay more or less to your employee.
However, if you pay your employee more, that excess will be taxable to that employee.
If you pay less, the IRS provides two choices for setting your per diems:
- Take your total per diem amount and designate 60% for lodging and 40% for meals
- Take your total per diem amount, take away the standard meals and incidents rate, and then treat the remainder as the lodging per diem
As an employer, regardless of what rates you choose, just make sure you're consistent.
Here are some travel and expense management resources to make your expense reporting a breeze!
What Is per diem employment?
Sometimes, a business may have workers who come in on a per-day basis. They might come in to fill in gaps, like when a full-time employee is on medical leave. Rather than paying those per diem workers an hourly rate, you might agree on a per-day rate.
Those per diem workers can be classified as either contractors or employees. Just make sure you follow the relevant payroll rules and be good at keeping ALL your records.
Our concluding statements
Is per diem taxable? The simple answer is yes and no.
Just like we mentioned above, per diem payments are there to provide reimbursement to employees who travel for their jobs. If those payments DO NOT exceed the maximum federal per diem rate, then they are non-taxable. However, if they DO exceed that federal rate, then any of that excess will be deemed as ordinary income. Thus, it is taxable.