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Per Diem: To Pay or Not To Pay

02/03/10

Permalink 11:20:18 am, Categories: EDI, efficiencies

Many people in the transportation industry misunderstand per diem. Per diem is simply reimbursing drivers for meals and incidental expenses incurred while working away from home, but it is complicated by the tax laws. The IRS has created special per diem rules for the transportation industry that differ from regular business rules. Let’s look at some of these rules.

In it simplest form, the driver would save all receipts for meals and incidental expenses while away from home base. When filing tax returns each year, if itemizing, 80% of these expenses can be deducted from gross income.

The IRS, however, has agreed to allow trucking companies to prepay per diem expenses as a non-taxable amount under certain conditions: (1) the company must have an "accountable" per diem plan, (2) the driver must be away from his "home" long enough to require a rest period per the DOT HOS rules, and (3) the driver must have a "home" (if the driver has no permanent domicile he cannot deduct these expenses). If these requirements are met, the per diem amount will be exempt from federal withholding, FICA, and Medicare taxes. If any one of the requirements is not met, the company cannot prepay expenses on a tax free basis. They can still reimburse the driver for expenses if they choose, but it will be reported as regular income.

A plan is considered accountable if: (1) it covers only business expenses, (2) all expenses are substantiated, and (3) the employee is required to return to the employer any prepaid amount over the substantiated amount. Sounds like a head ache right? The IRS however has made it easier by setting a "meal and incidental expense (MI)" amount and as long as the per diem amount is less that this standard amount, rules two and three are considered substantiated. Currently the federal MI amount is $59.00 per day away from home.

Let's take a simple example: A driver is away from home 5 nights and is at home 2 nights per week. Salary is $1000/week including per diem expenses. At the $59 per day amount $236 (59 x 5 x 80%) could be deducted from gross salary before calculating federal withholding, FICA, and Medicare taxes. Instead of paying taxes on $1000, taxes would only be paid on $764. This would benefit both the company and the driver.

The IRS has allowed transportations companies to calculate per diem amounts per, per mile, or as a percent of gross, as long as the total paid does not exceed the $59 per day away from home. If paying per diem as mileage or percentage, this needs to be monitored occasionally to insure that the per diem amount stays below the federal guideline.

There are some negative things to consider however for both the driver and the company.

For the driver:

  • If the per diem is being deducted before paying FICA taxes, your retirement benefits may be lower. However, if the tax savings is invested in an IRA or 401K, there is usually a much greater benefit received than from paying additional FICA taxes.
  • When applying for a loan, the banks typically look at taxable income. Thus deducting per diem will lower the taxable income showing on the paycheck stub. If the bank uses the 1040 return to find total taxable income, this will not be an issue, as the MI expenses will have been deducted from your 1040 also.

For the company:

  • If a company is audited and the IRS finds you have routinely paid drivers more than the standard daily amount, taxes will have to be paid on all per diem paid out, not just on the over payment. It is important to monitor the per diem payments to insure they do not exceed the federal standard.
  • There can be administrative costs associated with deducting and monitoring per diem pay. These can be minimized however, by using a good trucking software package such as TruckMaster which makes per diem calculations a simple part of the settlement process.

Talk to a tax advisor before making changes, but generally a company can save a bundle on taxes by paying per diem correctly, plus it benefits the drivers as well.

Craig Sorensen
TruckMaster Solution Provider
TruckMaster Your Trucking Company

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