By Alison Dunleavy, Principal, UHY Advisors
Using the per diem allowance rule can help alleviate the recordkeeping for lodging, meals, and incidental expenses incurred by an employee while away from home overnight on business. It can be a useful tool when you have many employees traveling on business at once. However, are you aware of the Internal Revenue Service requirements for reporting billable per diems on customer invoices?
Per diems are generally tax-free for the employees and deductible by the employer. They are used as a reimbursement of ordinary and normal business expenses incurred by the employees, while they are traveling for business away from home. Normal business expenses include items such as meals, lodging, and incidental expenses. The General Services Administration (GSA) creates tables each year that reflect an amount per day that is generally thought to be sufficient to cover lodging, food, and incidental expenses in your travel location based on average market rates.
Merely implementing a per diem plan does not in and of itself make such payments tax-free to employees. The plan must be deemed a “qualified per diem plan” in order for the reimbursement payments to be considered tax-free. Failure to properly administer a per diem plan that is intended to be qualified, will have adverse tax implications for both employees and the employer.
The below requirements must be satisfied in order to have an accountable plan in the eyes of the Internal Revenue Service:
- Have a business purpose: Make sure the expenses are ordinary and necessary
- Maintain accurate records: No receipts required, but the employee must maintain a log which records days worked away from home, the location of the work, and the business purpose
Things you should think about when implementing an accountable plan:
- Consider the employee’s “tax home”: Per diem expenses are only allowed when the employee is traveling away from their tax home and for less than one year
- Do not treat per diem allowances as salary alternatives: Do not give the employee the choice of accepting a higher wage with no per diem or lower wage with a higher per diem
- Do not provide an allowance in excess of the IRS-approved rates: This could be reclassified as income to the employee
An item unique to the staffing industry is the reimbursement of the per diem expenses, from the customer, along with the wages of the temporary employee. These expenses, under Internal Revenue Code §274(e)(3), are deemed reimbursed expenses for costs directly related to the fulfillment of a contract. Therefore, the costs are fully deductible to the company and not subject to the deduction limitation that “normally” goes with deductible business meals. Normally is in quotations as the COVID-19 Relief Bill signed into law on December 27, 2020 gave a slight reprieve to businesses for the 2021 and 2022 calendar year. With this new legislation, businesses will be permitted to fully deduct business meals that would normally only be 50% deductible.
In order to make sure you are compliant with Internal Revenue Service rules, you will need to follow a few important items. First, the per diem expense reimbursement must be separately stated on each invoice. They cannot be blended into the employee’s pay rate being charged to the customer. Second, you should review your customer agreement to ensure it does not expressly identify the party that will be subject to the “normal” 50 percent business meal limitation. Even with the new, temporary legislation that was signed into law, giving permission to fully deduct business meals for 2021 and 2022, it is still recommend to separately state the per diem expense on each invoice.