When you work in contract staffing, you place workers with your clients’ businesses constantly. Those employees are either on your payroll, or on the payroll of an employer of record. Sometimes, your clients are in a different locality than the contract workers. To accommodate the employees, you might provide a per diem employment agreement. What is per diem for contractors?
Per diem for contractors
Per diem is Latin for “per day” or “for each day.” Think of per diem as a daily stipend you give employees to go toward necessities. As the employer of record, you can choose to provide per diem for contractors.
Employers often choose to pay a per diem rate to an employee on business travel instead of reimbursing them for the actual cost of expenses incurred.
What does per diem cover?
Per diem covers lodging (apartment, hotel), meals, and incidental expenses (fees and tips given to baggage carriers, hotel staff, porters, and staff on ships).
It does not cover transportation expenses like car rental or airfare. Transportation expenses are normally handled as an actual expense. The employee receives reimbursement.
Who qualifies for per diem?
To qualify for full per diem, the contractor must maintain two residences during the contract assignment. In addition to their primary residence, the contractor must have a qualifying secondary residence.
Staying with a friend or family member does not qualify as a secondary residence.
Meals and Incidental Expenses (M&IE) only
In some situations, the contractor only receives per diem for M&IE. Generally speaking, a contractor will be entitled to M&IE when their work duties require them to be outside of the general area of their home longer than an ordinary workday.
For example, the M&IE portion only would be paid if:
- The client provides the lodging or reimburses the contractor directly for lodging
- The contractor does not expect lodging expenses to be incurred but will be away from their tax home longer than a standard workday (i.e., staying with family members)
- If the standard workday is consistently exceeded and it would be unreasonable to have the contractor return to their tax home (isolated cases)
How long does per diem last?
Contractor per diem cannot be given for more than 12 continuous months on the same contract assignment. If the contractor is still on the same contract assignment after 12 months, the per diem rate should be discontinued.
However, the rate for expenses can be added to the contractor’s taxable income when the 12-month time frame is up.
Contractor per diem rates
The IRS per diem rates for contractors depends on the method you use. There are two different substantiation methods used to calculate per diem rates:
- High-low method
- Regular federal per diem rate method
With the high-low method, the IRS sets a standard, or “low,” daily rate that applies to most localities and a “high” rate for large cities that generally have a higher cost of living. For example, cities like Boston, New York City, and San Francisco use the high rate.
The rates change annually. The current per diem rate for any high-cost locality is $282, and of that amount $68 is designated for meals. For other localities within the Continental United States (CONUS), the per diem rate is $189 with $57 going toward meals.
Federal per diem rate method
Federal per diem rates change based on the locality the contractor is sent to. The U.S. General Services Administration publishes the rates. They also offer a great tool that lets you find current per diem rates of any city and state in CONUS. The rates for lodging might change per month.
The 2017 standard rate is $142, with $51 going toward meals and incidental expenses. If your city or county is not listed on the GSA per diem rate page, you must use this standard rate. On the first and last day of the employee’s travel, you only pay 75% of the standard rate.
Since rates differ depending on locality, make sure you do your research. For example, the per diem rate for lodging, meals, and incidentals in September 2017 is $375 in New York City, New York and $157 in El Paso, Texas.
For more information on per diem rates, consult the IRS’s Publication 463.
Is per diem taxable for contractors?
Is per diem taxable for contractors? The per diem reimbursement is not subject to payroll tax withholdings and is not reported as income on the employee’s W-2 if the following two conditions are met:
- The rate paid to the employees does not exceed the IRS approved maximum rates
- The employee provides an expense report (business purpose, date and place, receipts)
Per diem rates are taxable if any of the following take place:
- The employee does not file an expense report
- The expense report does not include the date, time, place, amount, and business purpose of the expense
- You give the employee a flat rate and don’t require an expense report
- You pay the employee more than the standard federal rate
You can pay contract workers above the federal rate, but the amount that exceeds the federal threshold needs to be included in their taxable income.
Common myth about per diem
Many believe per diem can be given even if the contractor is permanently relocating their family to the new work location. In this situation, the contractor would not be entitled to per diem because they are not paying for two different residences.
If a contractor receives full per diem when they shouldn’t, it opens you, your client’s company, and the contractor up to IRS scrutiny and audits. Educate your clients and contractors on per diem.
Your client can request that a candidate is reimbursed using the actual expense method instead of receiving a per diem rate.
If that happens, you (or your back-office solutions provider) would request a traditional expense form with receipts for expenses incurred by the contractor.
Clients can also handle expenses directly with the contractor. You would not need to reimburse expenses in the contractor’s pay or provide per diem.
How to avoid dealing with per diem rates for contractors
Want to avoid having to worry about dealing with per diem rates altogether? Let FoxHire’s Contract Staffing Services act as the employer of record for your contract workers. We’ll handle the legal, financial, and administrative details of the process.