Many drivers today are keen to benefit from receiving tax-free per diem pay. Failure to adopt an effective per diem reimbursement plan can frustrate a transportation company’s efforts to attract and retain these drivers. Provided the company aligns its per diem reimbursement arrangement with IRS guidelines, employee drivers can receive a substantial tax benefit at little or no cost to the employer.
Per diem arrangements use a predetermined daily rate to reimburse employee drivers for the cost of meals and incidental expenses incurred during overnight trips, rather than forcing drivers to bear that cost out of pocket. When the company reimburses meal and incidental costs, drivers are usually willing to accept a lower-base salary. Revenue Procedure 2011-47 contains special rules for per diem allowances used in the transportation industry.
The Tax Cuts and Jobs Act eliminated the employee driver’s tax deduction for unreimbursed meals, which magnified the opportunity to save taxes through per diem arrangements. Because reimbursement under a qualified per diem plan isn’t considered taxable income to the employees for income tax or payroll tax purposes, drivers usually enjoy substantial tax savings by participating in a per diem plan.
The overall tax effect on the company and employee driver can be demonstrated as follows:
In the above scenario, the employee driver realizes nearly $4,900 in tax savings through proper use of a per diem reimbursement arrangement, at minimal additional cost to the company.
Note that the IRS-established rates are based on days, not miles, so it’s important to craft a reimbursement plan that won’t exceed the maximum daily per diem allowance. Beginning October 1, 2019, the maximum allowed rate is $66 per day for transportation workers operating within the continental United States. Companies have flexibility to establish a rate that fits their specific situation; however, the per diem reimbursement is tax-free only if it’s set at or below the IRS-established rate. The following additional rules apply to per diem arrangements:
- Substantiation of time, place and business purpose for the trip is required to support per diem reimbursement. In general, the company’s load tracking records will satisfy this requirement.
- Drivers are entitled to a per diem allowance for meals and incidentals only when they’re gone longer than an ordinary workday and are required to stop and sleep. In general, drivers operating trucks with sleeper cabs can’t claim additional per diem reimbursement for lodging.
- The per diem allowance must be reasonably calculated to not exceed the amount of the actual anticipated expenses for meals and incidental expenses.
- Internal Revenue Code Section 274 generally limits the company’s deduction for meal and incidental per diem expenses to 80 percent of the amount incurred for workers subject to the U.S. Department of Transportation’s hours of service limitations.
As demonstrated above, drivers should realize overall tax savings when paid through a per diem arrangement. However, the downside for drivers is a lower annual Social Security contribution, and their ability to contribute to a retirement plan can be curtailed due to the decrease in gross taxable wages.
The IRS rules surrounding per diem arrangements are complex, and companies seeking to establish per diem plans should seek professional advice to assess whether their arrangement constitutes a qualified plan. For more information on this topic, reach out to your BKD Trusted Advisor™ or use the Contact Us form below.