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Companies often use a per diem payment to employees traveling for business, particularly for extended periods of time to cover lodging, meals and incidentals. The U.S. General Services Administration recommends and the IRS recognizes a per diem allowance based on location, and the amount is usually not reported as taxable income. However, in some cases a portion of the amount may be taxable. It's vital to save receipts from all business expenditures to avoid incurring additional tax liability. A deduction is only allowed when the per diem does not cover expenses or it is incorrectly included in taxable income.
The GSA uses two methods for calculating per diem, the high-low method and a standard rate. High-low offers only two rates, one for higher-priced locations and a second for lower-priced locations. The standard method offers different rates for each location, and while more accurate, it requires more record-keeping. A company must use one method for all employees for a given year and may not change methods or differentiate among employees.
Travel days are paid at three-quarters of the full day's rate, regardless of the time or length of travel. If actual expenses exceed the allowed per diem, the employee may request additional reimbursement or take a deduction for unreimbursed business expenses on IRS Form 2016 and Schedule A.
The IRS treats a per diem payment as a reimbursement for business expenses. As such, the amount is not taxable income, as long as the per diem does not exceed the actual expenses incurred. Employees are expected by IRS rules to keep track of itemized expenses and return any excess per diem payment to the employer, otherwise the excess is reported as wages on the W-2, and taxed as income. If the per diem is more than the federal rate, the employer is required to verify both the nature and amount of the expense, or report the excess amount as income. At the minimum, the IRS requires records to show the time, place, and business purpose of travel.
If the per diem amount is not sufficient to cover employee business expenses, then the employee may take a deduction for unreimbursed expenses. File Form 2106, showing both the documented expenses and the amount of per diem received as a reimbursement. Only unreimbursed amounts greater than 2 percent of adjusted gross income can be deducted. The deduction goes on Schedule A, Itemized Deductions.
Self-employed individuals can only use a per diem rate for meals and not for combined lodging and meals. The cost of lodging and incidentals can be fully deducted on Schedule C, E or F, depending on the type of business. Amounts in excess of the actual expenses must be repaid. Employees of a sole proprietorship are subject to regular employee per diem rules and reporting on lodging, meals and incidentals.
- business trip image by Alexey Klementiev from Fotolia.com