A company can pay its employees for expenses related to travel without generating tax-deductible income by paying them per-diem rates. These rates are based on the cost of travel to where it is. The majority of them applicable to journeys within the U.S. are set by the General Services Administration (GSA).
Find out more about the rates, as well as the conditions under which they are allowed to be employed and when they shouldn’t.
What is The Per Diem Rates?
The term “per-diem”per diem — which comes from”per day” in Latin meaning “by day”–refers to an allowance per day for expenses for travel that employees pay. There are rates for per diem for two different components:
- Foods and other incidentals
The rates are determined by federal agencies and are applicable to federal employees travelling for work. They are also used by the Internal Revenue Service for the purpose of determining whether non-federal-government employees owe taxes on reimbursements for work-related travel expenses.
Beginning with tax returns for 2019, the incidental costs (IE) comprise only tips and fees given to baggage carriers, porters and ships, and hotel staff members. Travel expenses for getting between the business, hotel, and dining places as well as for sending travel vouchers to customers as well as credit card charges are no longer part of IE. These expenses for travel and postage must be paid separately, just as be those for cleaning and laundry service. 1 2
How Do Per Diem Rates Work?
Your company must be able to establish an accountable program for employee reimbursement expenses to allow reimbursements not to be taxed and treated as pay. If your employee is following the guidelines in your accountability plan you shouldn’t include the number of reimbursements in the total amount that is reported in the first box of their W-2 form. 4
Accountable Plan Criteria
In order to be considered an accountability plan, it must adhere to three principles.
- The employee’s expenses should have an affiliation with a business.
- The employee is required to account to you for these costs within a reasonable time period of.
- The employee is required to return any additional reimbursement or allowance within a reasonable time duration.
The employee must record within their reports on expenses the cost the time, date, location, and the business reason for every meal, accommodation, or other incidental expense.
The Internal Revenue Service states that “a reasonable time frame” is dependent on each specific situation, but it offers examples of activities that could be considered to have taken place within a reasonable amount of duration.
- The employee gets an amount of money within the 30 day of the day they incurred an expense.
- The employee properly accounted on their expenditures within 60 days following the date they were paid or had expenses.
- The employee was required to return any excess amount within one year following the expense was paid for or the expense was incurred.
- The company issues a regular–at at least every quarter–statement asking employees to return or account in a timely manner for outstanding advances. The employee is required to do so within 120 days from receiving the date of the statement.
A surplus reimbursement or allowance is any amount that an employee receives that is higher than the costs they’ve had to report in their paycheck to the employer.
Per Diem Use Criteria
The IRS will consider your company’s use of the per-diem allowance as proof of the expenses paid by employees if the four requirements are satisfied.
- You limit the payment of expenses to those expenses that are normal and required in the execution of business or trade.
- The allowance is in its structure to but not greater than the federal rate.
- They can prove the date location, date, and motive behind their expenses in a timely amount of time.
- They’re not related to you.
If They have a connection to you or fail to satisfy any other requirements They have to be able to demonstrate the cost of their per diem to the IRS. 6
How Per Diem Rates Are Set
The General Services Administration sets the per-diem rate for each state and city in the continental (also called continental) United States (CONUS). The rates for per diem are higher in areas with higher costs and, in some instances, they may also differ depending on the time of year. Prices for meals, hotels and other common costs for travel may vary between cities and from summer to winter. 1
The Department of Defense (DOD) determines the per-diem rates applicable to Alaska, Hawaii, and U.S. territories and possessions that are known as OCONUS (outside the contiguous United States) for short. It is the Department of State (DOS) determines per-diem rates for other nations.
The per-diem rates are adjusted every year, typically the 1st of October, the start in the U.S. government’s fiscal year.
For CONUS destinations The per-diem rate for lodging does not include taxes. Also, on the days that are the first and the last in travel per-diem amount for meal and incidents (M&IEs) will be 75% the total day total. 7
Finding Per Diem Rates
Employees can find per diem rates for the locations that they travel on the Per Diem Rates of the GSA and the Per Diem Rates for the Department of Defense Query as well as the DOS’s Foreign PerDiem Rates by location websites.
Alternatives to the Per Diem Rates
You may decide to pay your employees for the actual expenses of their travel or pay a flat fee for each trip, however, employees are expected to pay taxes on the portion that is greater than the per-diem amount and you’ll need to pay for employment taxes too. 9
In lieu of using real per-diem costs for every location, your company’s employees could use an approach known as a high-low that consists of a single rate for all destinations that are high-cost and an lower rate for the other destinations. From October. 1st, 2020 the price for high-cost destinations is $292 with the $71 fee for M&IE. For other locations, it’s $198 which includes $60 of M&IE.
Tax Deductions for Per Diem Rates
Your company can be able to deduct 100 percent of the amount that is reimbursed to employees for lodging costs, however, only 50 percent of the amount that is reimbursed for meals. 10 Your employees are entitled to be able to deduct 50% of the cost of meals that are not reimbursed over the per-diem rate. It is not possible to deduct expenses that they have been reimbursed for.