If you have employees who travel for your business, would the IRS travel per diem method simplify your recordkeeping and reduce your risk of audit disallowance?
The per diem travel reimbursement meets the proof of expense requirements for an accountable plan. This removes audit-disallowance risk and also makes travel reimbursement policies clear to your employees.
What’s the Per Diem?
The travel per diem rates fall into three categories. Here are the current rates that apply for tax year 2020, albeit you can use the 2021 rates when posted on October 1, 2020, for the last quarter of the year:
- Per diem allowance (lodging, meals, and incidentals)
- Standard meal allowance (meals and incidentals) at rates ranging from $55 to $76 per day, depending on location
- Incidentals only at $5 per day
The IRS currently defines “incidentals” as fees and tips given to porters, baggage carriers, bellhops, hotel staff, and staff on ships.
The applicable federal amounts for the per diem allowance and standard meal allowance are adjusted for inflation and vary by location; current amounts are at the General Services Administration website.
The place you sleep on a given day is the location that dictates the amounts for that day.
When your employees travel for work, you can give them a per diem allowance for their meals, lodging, and incidentals—no substantiation of the actual amounts spent is required.
Note that the employees are still required to keep track of the time, place, and business purpose of their travel using an expense report, trip log, or something similar.
The amount considered substantiated is either the per diem amount they receive or the applicable federal per diem rate, whichever is smaller. Employees can keep any money less than the per diem no problem. For any money in excess of the per diem, you, the employer, have to put that on the employee’s W-2 as taxable wages.
How Much Can Employers Deduct?
Unless you are using per diems to reimburse incidentals only, your per diem reimbursement will have a business meal component for which the tax law grants you a partial deduction only.
Transportation employees. Employers that reimburse employees’ food and beverage travel expenses are allowed to deduct 80 percent of the amounts reimbursed to employees who are working subject to Department of Transportation (DOT) hours-of-service limitations (explained below).
Non-transportation employees. Your employer deduction is 50 percent for food and beverage expenses reimbursed to traveling employees who are not in the “transportation” category.
The percentage limits apply to both actual expense reimbursements and per diem reimbursements.
The following employees are in the transportation group:
- Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations;
- Interstate truck operators and bus drivers who are under DOT regulations;
- Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who are under Federal Railroad Administration regulations; and
- Certain merchant mariners who are under Coast Guard regulations.
Two special rules apply to the transportation group. You may remember the first special rule from above, where the tax law allows you, the employer, to deduct 80 percent of the meal expenses that you reimburse to your defined transportation employees.
Example. You reimburse your transportation worker using the per diem rate for meals and incidentals. Your worker is in Vail, Colo., for the day. The meal and incidental rate for Vail is $76 a day.
You reimburse your employee $76. Your tax deduction is $61 ($76 x 80 percent).
Second special rule. Under the high-low per diem method, there is a special transportation industry per diem rate for meals and incidental expenses; that rate is currently $66 for locations within the continental U.S. (CONUS) and $71 for locations outside the continental U.S.
When using the high-low reimbursement to a non-transportation employee, the meal and incidental limits are $71 for travel to any high-cost locality and $60 for travel to any other locality within the CONUS.