Is Per Diem Deductible for Employers?

Per diem, a Latin term meaning ‘for each day,’ refers to the allowance provided to employees for daily expenses while on business travel. Typically covering meals, lodging, and incidental expenditures, per diem is designed to alleviate the financial burden of travel for employees.

Employers may leverage per diem payments as a simplified method to manage travel costs, circumventing the need for detailed expense reporting. A critical consideration for businesses is whether these payments are tax-deductible.

The deductibility of per diem allowances can have significant implications for a company’s financial management and tax planning strategies. This brief examination will elucidate the criteria under which per diem is considered deductible for employers, aligning with the prevailing tax regulations and guidelines.

What Is Per Diem?

In the context of business expenses, ‘per diem’ refers to a predetermined daily allowance provided to employees to cover costs incurred while traveling for work-related activities. This system simplifies the management of travel expenditures by setting a fixed amount that an employee is entitled to receive for each day they are on duty away from their usual place of work, thus avoiding the need for detailed expense tracking and reporting.

Per diem rates are designed to cover various expenses, including lodging, meals, and incidental costs that employees might encounter. These rates are often determined by the geographical location to which the employee is traveling, reflecting the cost of living differences across various destinations. Some organizations adopt the per diem rates established by the General Services Administration (GSA) for travel within the United States, while others may set their own rates based on internal policies.

For mileage, per diem rates are standardized by the Internal Revenue Service (IRS). In 2023, the IRS has set the rate at $0.655 per mile to cover the costs of operating an automobile for business purposes. This rate is subject to change annually, with the rate for 2024 set to be $0.67 per mile. These standardized rates aid in maintaining consistency and fairness in reimbursement for business travel.

What Does Per Diem Cover?

Per diem allowances typically encompass costs related to lodging, meals, and incidental expenses an employee might incur while on business travel. The intent behind providing a per diem is to ease the financial burden that comes with traveling for work, by giving employees a set amount they can spend each day. This approach simplifies record-keeping for both the employee and employer since receipts are not typically required to account for expenses up to the per diem rate.

Lodging covers the cost of a hotel or similar accommodations. The per diem rate for lodging is often set by the employer based on the destination’s average costs, and it can vary by city and time of year.

For meals, the per diem provides a daily sum to cover food and beverages. Incidental expenses might include tips for services, fees for baggage handlers, and other small costs not directly related to travel or lodging.

The per diem rates can be determined by the employer or, in some cases, by following the rates set by the General Services Administration (GSA) for travel within the United States or the State Department for international travel. These rates are designed to be fair and reasonable, reflecting the cost of living in various locations.

Is Per Diem Tax Deductible for Employers?

Employers can deduct the entirety of standard per diem allowances paid to employees as business expenses on their taxes. These deductions are a significant benefit for companies as they can reduce overall tax liability, improving financial efficiency. The Internal Revenue Service (IRS) provides guidelines for per diem rates, which are updated annually and vary by location.

To ensure that per diem payments are fully deductible, employers must adhere to the following stipulations:

• Accountable Plan Compliance: Per diem payments must be made under an accountable plan, which mandates that the expenses are business-related, adequately accounted for, and any excess is returned to the employer.
• Standard Rate Adherence: The amount deducted should not exceed the IRS-approved per diem rates. Payments above these rates require additional documentation and may incur taxes.
• Documentation and Timeliness: Proper documentation of expenses is essential, and records must be submitted within a reasonable period.

Is Per Diem Taxable For Employees?

For employees, per diem payments are generally not taxable income provided that they adhere to an employer’s accountable plan and do not exceed the IRS-established rates for lodging, meals, and incidental expenses. This means that when per diem is given within the set standards for business travel costs, it is a reimbursement rather than a form of additional income.

However, if the per diem allowance surpasses the federal per diem rates, the excess amount becomes taxable. The IRS requires that these amounts be included in the employee’s wages on their W-2 form, subject to income and employment taxes.

In instances where a company does not use an accountable plan or if employees fail to provide necessary documentation within 60 days, such as expense reports detailing the date, place, and purpose of their trip, the entire per diem amount is considered taxable income.

It is crucial for both employers and employees to understand these guidelines to ensure compliance with tax laws and to avoid unnecessary taxation. Employees should keep accurate records of their travel expenses and report any discrepancies to their employer to ensure their per diem payments remain non-taxable.

Conclusion

In conclusion, per diem allowances serve as a method to compensate employees for travel-related expenses. Such allowances are deductible for employers when they meet IRS guidelines and are appropriately substantiated. For employees, per diem payments are typically not taxable, provided they do not exceed the federal per diem rates and are accounted for according to the IRS regulations. Compliance with tax rules ensures mutual benefit and legality in the use of per diem allowances.