You may have heard that the IRS recently released per diem rates for 2017-2018. These new rates are effective from October 1 through September 30 of 2018. In light of the new rates, we thought it might be wise to publish a reminder to our clients who make use of per diem payments.
The official IRS definition of per diem is as follows:
"An allowance paid to your employees for lodging, meals, and incidental expenses incurred when traveling. This allowance is in lieu of paying their actual travel expenses."
Whether you call it a per diem allowance, reimbursement, or payment, there are certain IRS rules that have to be adhered to. The first thing to note is that the per diem allowance is intended to cover the cost of certain business expenses that are not normally the responsibility of the employee. For example, most companies would not expect sales executives to pay for their own lodging when attending out-of-town sales meetings.
Differing Per Diem Rates
The IRS has established differing per diem rates according to destinations and expenses. For example, there is one rate for incidental expenses and another rate for travel expenses. Both of those rates can vary depending on the destination an employee is being sent to. Incidentally, this is what makes per diem allowances so confusing to a lot of small business HR departments. It is yet another reason to contract payroll with a company like BenefitMall.
As just an example of what is in store for 2017-2018, the IRS has established the following rates for meals and incidental expenses:
- $62 per day for travel within the continental U.S.
- $68 per day for travel anywhere else
Per Diem in Taxes
The biggest concern surrounding per diem relates to taxes. Per diem reimbursements are normally not considered employee wages as long as payments are equal to or less than established federal rates. However, employees are required to file expense reports with employers detailing per diem expenses.
An expense report must include the purpose of the trip in question, the date of the trip, the destination traveled to, and any and all receipts for covered expenses. The law requires employees to file expense reports within a "reasonable period of time", which is generally construed to be 60 days or less.
Here's the most important thing you need to know: per diem payments are automatically considered income if an employee fails to file a timely expense report. This implies a couple of important things.
First, employers have to keep track of whether they receive expense reports for their per diem payments. In the absence of an expense report, employers must record and report per diem payments as income. They must also include those payments when calculating payroll tax deductions. Again, a per diem payment that is not covered by an appropriate expense report is considered income and is subject to all the same rules that apply to regular income.
Second, employees have the added responsibility of reporting per diem payments if they fail to file expense reports. That means even if the employer does not include such payments in the total wages, tips and salary reported on a W-2 form, the employee is still responsible for reporting the income on his or her individual tax return.
As you can see, per diem expenses can cause problems with employee payroll if they are not handled correctly. If your company struggles at all with per diem payments and IRS compliance, you might want to consider a full-service payroll solution from BenefitMall.