If your employees go out of town on company business, likely the company is picking up the tab. From a tax perspective, there are certain ways to do this that can minimize taxes for the company and employees while simplifying record-keeping. Sounds too good to be true? Just look:
Accountable plans
Reimbursements to employees for business travel costs (lodging, meals, and incidental expenses) can be done through:
- An accountable plan. With this plan, you don’t treat reimbursements as compensation. They’re not reported on the employees’ W-2s; they’re not subject to payroll taxes. Employers deduct the travel costs to the extent otherwise allowable.
- A nonaccountable plan. With this plan, report reimbursements as taxable compensation and subject to payroll taxes. Employees may then deduct the amounts on their personal returns if they itemize deductions, but only total amounts in excess of 2% of adjusted gross income can be written off. Employers deduct the compensation; not the travel costs.
The requirements for an accountable plan are in IRS Publication 463.
Per diem rates
Reimbursements can be made for actual travel costs. Alternatively, you can rely on per diem rates for travel within the continental U.S. (CONUS). If you use per diem rates for an accountable plan, employees do not have to provide you with detailed information about their daily travel costs; they are deemed to have substantiated the amount to you. (The reason why there’s a breakout for meals is to enable you to apply the 50% limit on deducting this portion of employees’ travel costs.) You have two per diem rate options:
- GSA rates. These are rates set by the federal government for its employees. The rates apply to the government’s fiscal year beginning October 1. For example, the standard federal per diem rate for fiscal year 2018 (October 1, 2017, through September 30, 2018), which is applicable to most locations, is $144, of which $93 is for lodging and $51 for meals and incidental expenses (M&IE). Higher rates apply to about 350 areas within the U.S. A complete list of rates can be found at GSA.gov.
- IRS high-low substantiation rates. The IRS sets its own per diem rates that employers can use for substantiation purposes. There is a rate for high-cost areas designated by the IRS, as well as a rate for low-cost areas. For travel from October 1, 2017, through September 30, 2018, the per diem rate for high-cost areas is $284 per day (of which $68 represents meals and incidental expenses, or M&IE). The rate for low-cost areas is $191 per day (of which $57 is for M&IEs). More complete information about these rates is in Notice 2017-54. Note: Employers can opt to use the prior FY rates for the balance of 2017 if they’ve used the rates for the previous 9 months of 2017.
Special rate for transportation workers
Employees individuals engaged in the transportation industry (e.g., interstate truckers) have a special M&IE rate for travel within CONUS: $63 per day.
Special rules for self-employed individuals
If you’re self-employed, you can’t use a per diem rate to substantiate your lodging costs; you need actual records. However, you can choose to use the federal per diem rates for meals and IEs. Depending on the locality of the travel, the standard daily rates are $51 for most locations, but $54, $59, $64, $69, or $74 for certain higher-cost locations (check GSA.gov). Self-employed individuals in the transportation industry use the $63 per day rate for travel within CONUS.
Conclusion
If you haven’t been using an accountable plan, consider doing so for 2018. Talk with your tax advisor now to get it set up properly by the start of the year. Be sure to educate your employees on what they need to do so their reimbursements will be tax free.
