For small business owners opting to use non-accountable business expense reimbursement plans for employees, there are some important per diem tax rules, tracking, and tax implications to consider. Depending upon where your employees travel throughout the United States, these per diem tax rules can fluctuate from state to state. Having a clear understanding of how to track these expenses ensures proper compliance with state and federal per diem tax rules and guidelines.
Companies needing to reimburse employees who incur business-related expenses have the choice between accountable and non-accountable plans. Accountable plans include the employee covering expenses out of pocket, submitting receipts in an expense report, and then being reimbursed for all business expenses by their employer.
Non-accountable per diem plans include the employer providing the employee with a predetermined daily spending amount or “allowance.” However, for that daily allowance to be considered non-taxable income for the employee, it must respect the federal per diem rate for the state the employee travels to.
The obvious benefit of using a per diem system – or daily allowance – is that it removes any potential friction between the employee and employer. An example would include an employee receiving $80 every day they travel as opposed to the employee having to cover expenses out of pocket and having to wait for reimbursement.
IRS per diem reimbursement rules stipulate two conditions under which the daily allowance received by the employee won’t be considered income. The first condition is that the employee submits an expense report to their employer within 60 days of having returned from their business trip. That expense report should define where, when (dates), and why the employee traveled, as well as receipts for lodging and meals.
The second condition that ensures the per diem isn’t considered income for the employee is if the amount of the per diem/daily allowance is less than or equal to the daily federal per diem rate for the given state they traveled to.
While small businesses are certainly allowed to give a higher daily per diem to their employees than the given federal per diem rate, the difference must be included as income on the employee’s W-2 form. The difficulty for small business owners with per diem tracking is accounting for employees who travel to multiple states – each with their own federal per diem rate.
Adding to the complexity of IRS per diem tax rules and per diem tracking is that, in addition to different federal per diem rates by state, there are also per diem rates for different business expenses. For example, there is a federal per diem rate just for meals, one that covers meals and lodging, and one for meal & incidental expenses (M&IE) which covers room service, tipping, dry cleaning, and service fees.
Not only is per diem reimbursement and per diem tax a complicated process for small businesses, but the manual processes used to keep track of business expenses and travel are anything but efficient. Small businesses are often forced to rely upon manual paper tracking or convoluted spreadsheets that are never live, rarely updated, and never accurate.
Whether it’s providing forward-looking safety & risk management, helping your small business with employee benefits, managing payroll, or helping to reduce worker’s compensation costs, our services are designed to help small businesses reduce costs, grow their business, and solidify their futures.
We help remove the uncertainty that often accompanies per diem tax tracking and per diem reimbursement by providing your small business state-by-state per diem rates and helping you stay compliant with each state’s regulations.
We go a step further by tracking and reviewing per diem receipts and archiving your tax reimbursement and expense receipts.
As a well-established Professional Employer Organization (PEO), we bring over 36 years of industry experience alongside a comprehensive list of business management services. We have long been considered a critical partner to small businesses operating in multiple industrial and commercial markets such as construction, transportation, marine, forestry, sanitation, automotive, etc.
To learn more about how our team can ensure compliance while helping your small business better manage its per diem expenses, call us now at 866-720-6281 or request a quote.
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