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Per Diem Allowances

by Paula N. Singer

Employers are allowed to exclude from income an employee’s business-related travel expenses as a working condition fringe benefit under Section 132 when the amounts are paid or reimbursed under an accountable plan. To be excluded from income, the business-related travel expense amounts must be substantiated by receipts for actual expenses or direct payments to vendors. The IRS provides alternative substantiation rules in Revenue Procedure 2009-47 [Oct. 19, 2009] (updated annually) under which business-related travel expenses may be deemed substantiated by a per diem allowance in lieu of actual expenses.
 
The IRS revenue procedure defines a per diem allowance as a payment under a reimbursement or other expense allowance arrangement that is:

  • Paid with respect to ordinary and necessary business expenses incurred, or reasonably anticipated to be incurred,
  • Reasonably calculated not to exceed the amount of the expenses or the anticipated expenses, and
  • Paid at or below the applicable federal per diem rate.

Amounts that exceed the allowable per diem amount for the location are treated either as wages or self-employment income for tax purposes (depending on the relationship of the worker to the organization), unless the worker otherwise substantiates all of the expenses covered by the per diem allowance.

Two Substantiation Methods
Employers may use either of two substantiation methods: 1) the standard federal rate method or 2) the high-low rate method.

Under the standard federal rate method, an employer may pay its employees a rate for lodging, meals, and incidentals, or for meals and incidental expenses only (M&IE), while they are traveling away from home to a particular location. The rate, which varies by location and time of year, is the highest rate that the federal government pays to its employees.

The high-low rate method eliminates the need to keep a current list of per diem rates for each location. Locations indicated as high-cost by the IRS are eligible for the high-cost rate - $258 ($65 M&IE) per diem, effective October 1, 2009. For travel on or after October 1, 2009, the per diem for all other localities is $163 ($52 M&IE).

The M&IE rate must be prorated for partial days of travel under both methods.
Standard federal rates generally become effective on October 1st as do the high-low rates. For the last three months of the calendar year, the IRS allows employers to change to the new rates or to finish out the year with the rates that they were using. Table 11-1 of IRS Publication 535, Business Expenses, describes when per diem allowances must be reported depending on how they compare to the federal rates.

Independent Contractors
Although the regulations under Section 132 extend the accountable plan rule to independent contractors providing services to the employer, the deemed substantiation rule for per diems paid to independent contractors is different than the rule for employees. Independent contractors may not use the per diem amounts that include lodging as well as meal and incidental expenses. For independent contractors, lodging expenses must be substantiated under the regular accountable plan rules in order to be excludable.

The IRS revenue procedure provides an optional method for employees and independent contractors who are not reimbursed when computing the amounts for business meals and incidental expenses (M&IE), or for incidental expenses only if no meal expenses are paid or incurred, while traveling away from home.

Sources of Per Diem Rates
Allowable per diem amounts are available on the Internet on the website of the General Services Administration (GSA) at www.gsa.gov. Click on “Per Diem Rates” for links to per diem rates for:

  • Travel within the continental United States (CONUS)
  • Travel within areas outside the continental United States (OCONUS) such as Alaska, Hawaii, Puerto Rico, and U.S. possessions
  • Travel within foreign locations

ęCopyright 2010 by Windstar Technologies, Inc. Windstar reserves all rights to this electronic material. Information contained in this publication is based on the best information available at the time of publication. While believing the information in this publication to be accurate, Windstar accepts no legal responsibility for its accuracy


About The Author

Paula N. Singer, Esq. chairman of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer, Newton, MA, has over 25 years of experience providing advice and compliance services to employers on cross-border employment matters. She is also the editor of "US Tax Compliance For Immigrants And Employers: The Lawyer's Complete Guide". To learn more, see: http://www.ilw.com/store/tax.shtm. For more information, visit www.windstar.com. For additional information, call 1-800-259-6398 or email: info@windstar.com.


The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.


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