Advances in technology have vastly improved the ability for contractors to bid on and complete jobs in markets outside of their headquarters. With the growing number of contractors working on job sites away from home, the issues of per diem and travel allowances are often discussed. Any employee that works on a job at least 50 miles away from their home address qualifies for per diem if their employer offers it as a benefit.
If a company chooses to pay a per diem to their employees, they may use the IRS rates to cover lodging, meals and incidental expenses. Transportation expenses are not included in the per diem rates and should be handled as an actual expense that the employee is reimbursed for. A stipulation to receive the full per diem is that the employee must stay in a hotel or a second home. Staying in a free location, such as with a friend or family member, will cause them to be ineligible for the lodging portion, but still eligible to receive the meals and incidental reimbursement. If the contractor’s per diem is paid for more than twelve continuous months on the same contract assignment, then the per diem should be discontinued or will be added to the employee’s W-2.
The per diem allowance is not taxable to the employee if the payment does not exceed the federal per diem rate and the employee provides an expense report or receipts to their employer. Requiring an expense report is called an “accountable plan.” The accountable plan needs to include the date, time, place, amount and business purpose of the expense. Some companies may opt for a “non-accountable plan,” where an expense report is not required and the employee is paid a flat daily rate or monthly vehicle usage rate. Employees will have to report the reimbursements as taxable if their employer chooses to issue a flat rate, or if they pay more than the IRS allowance.
Before the new tax law beginning in 2018, if an employee was taxed on the reimbursement or was not compensated for the entire expense, they were eligible to list their expenses on their tax return on Schedule A. Schedule A is the form taxpayers use to itemize their deductions such as mortgage interest, property taxes, unreimbursed expenses and donations. Taxpayers have a choice to deduct the greater of their expenses or take the IRS standard amount. Unreimbursed business expenses were only deductible to the extent that they exceeded 2% of the employee’s income, which caused taxpayers to typically not be able to use the expense against their income. However, starting in 2018, taxpayers are no longer eligible to deduct miscellaneous itemized deductions on their tax return. The good news is that in 2018 the standard deduction increased to $24,000 per married couple or $12,000 for a single person.
Although the IRS limits the amount paid for meals and entertainment to only 50%, lodging expenses are fully deductible to the company. Under an accountable plan, the company must treat 40% of the per diem as meals and incidentals, meaning 20% of the employer-paid per diem is considered meals and entertainment and is nondeductible. If the contractor has a non-accountable plan and the employee is required to include the amount in their compensations, then it is fully deductible to the employer. Contractors can also deduct the expense fully if they are billing their customers for the expense or per diem. The amount must be included on their invoices for the IRS to allow the deduction in full.
Travel time to and from a job site is another issue mistakenly associated with per diem. Often workers will assume they should be paid a mileage rate or hourly rate for their travel time, but this is not correct. Only drivers using their personal vehicles to travel to and from a job site will be paid mileage for using their personal vehicles. The current standard mileage rate is 54.5 cents per mile, but is subject to change at any time and may be issued in addition to a monthly vehicle usage allowance, but both are solely at the employer’s discretion. The employer may also opt to pay any employee passengers for their travel time at their normal hourly rate, but again, is solely up to the employer.