Per diem is Latin for “per day,” which is how some employers choose to pay expenses for their contract workers. Contract workers may accrue expenses like travel or lodging, especially if they cross state lines to provide services on your behalf. This article will help you understand how the IRS considers these per diem payments and how you should be handling these payments.
Understanding Per Diem
When a contracting company elects to pay a contractor a per diem, they typically use the IRS rates to reimburse for incidentals, lodging, and meals. Consider this as a kind of allowance to cover travel expenses. This is a complicated process because this reimbursable rate can vary by state. There is also a per diem rate for meal costs alone, as well as a different rate for lodging and meal costs combined.
Some of the current rules for this tricky area of employee reimbursement include:
- You cannot include per diem payments in the employee’s wages if the payment is equal to or less than the per diem rate approved by the IRS.
- The employee must file an expense report with the employer that shows the purpose of the trip along with the date and location. It must also have receipts showing the expenses.
- However, the contractor could be taxed for these expenses if the rules are not met. This means they must file an expense report with the employer within 60-days, and it must have the proper information and receipts. If the per diem goes over the IRS-approved standard rate, the contract could also be taxed.
- Employers can pay more or less than the federally approved per diem rate, however, the contractor can be taxed for any excess.
- There is also the “meal and incidental expenses” or, M&IE. This includes all meals, room service, laundry, and dry cleaning, and the fees and tips for the people that provide these services. Like all of the per diem rates, they vary for different locations, adding an additional layer of complexity to the process.
- There is currently no per diem rate just for lodging, but you can pay a combined amount for lodging and M&IE. The approved federal reimbursement rate varies by location, so the employer must use the IRS rules to determine what is covered.
- In many cases you may find that the combined rate you pay to employees is less than the federal per diem rate. In these cases, the IRS wants you to consistently handle this in one of two ways. This is another area that can easily trip up employers.
Per diem is a helpful model for employers that have contractors working on job sites at least 50-miles from their home address. Employers do not have to offer per diem as a benefit, however, it’s a standard solution for many industries. However, given the complexities of these benefits, many employers opt to use an Employer of Record (EOR) like FoxHire to handle the administration of all contractor benefits, payroll, and more. It’s one of the benefits of using our firm.
Work With the EOR Experts!
FoxHire can handle the legal liability that comes with employer contracting. We have the expertise and staff available to manage this delicate and risk-laden portion of your business. This leaves you free to concentrate on the success of your business model. Talk with us about how we can help.