Zeroin on Per Diem Laws and Qualificationsby Rae Sours - November 11, 2014
In a contractor’s world, per diem is a hot topic of conversation. When a recruiter asks, what is your desired salary for a position like this? The answer usually begins with, is it a W2 or a 1099 and can I be paid a per diem? The problem has been, historically, that per diem laws are confusing, they’re fuzzy, and not all companies follow them to the letter of the law. These truths make it hard for many companies to recruit contractors who think that they qualify for per diem, but actually don’t. Here is what you must take into consideration when determining if a company can legally pay per diem or not.
The first thing to keep in mind is that receiving per diem is a reimbursement, it is not part of an hourly wage. Per Diem should be reasonably related to the expenses incurred, as determined by the IRS, and should not be based on a lavish style of living. To be considered a reimbursement under the IRS accountable expense reimbursement plan, the following requirements must be met:
1. The cost, or expense, must have a business connection. This means the expense must have been obtained while performing duties for the employer.
2. The cost must be substantiated. This means that the employee must show proof of the expense to the employer within a reasonable amount of time.
3. The employee must reimburse the employer for any amount in excess of the expenses actually accrued. (“Employment Law,” 2011, p. 261) These expenses typically fall into the categories of: lodging, meals, and travel expenses.
The next aspect for qualifying for per diem is the length of assignment. In tax terms, a temporary assignment or absence from home must not exceed the length of one year. However, if an assignment is originally expected to not exceed one year and realistic expectation changes, the classification of employment will be treated as temporary only until the date that the realistic expectation changes. If the realistic expectation does change within the length of one year, the reimbursement should be reclassified to reflect expenses as taxable income. (“Employment Law,” 2011, p. 262)
In order to qualify for per diem, a contractor has to maintain a permanent residence that is a far enough distance from their place of business that it would be unreasonable for the contractor to commute to and from their permanent residence on a daily basis. To determine if a contractor has a permanent residence you must take into consideration:
1. Does the employee perform a portion of his/her business from the residence or use the residence for business
2. Does the employee’s living expenses duplicate because business requires him/her to be away
3. Has the employee
3.1 left the vicinity of the residence
3.2 have family members currently living at the residence
3.3 use the residence frequently for lodging
If these statements are true and the contractor does have a permanent residence that is (by rule of thumb) 100+ miles away from the location of the services being provided, the expenses incurred by food and lodging can be classified as tax deductible. (“Employment Law,” 2011, p. 262)
Per Diem rates depend on the city/county that the work is being performed in. These rates are determined by the IRS and are adjusted each year. These CONUS tables can be found at http://www.gsa.gov/portal/content/104877 and are published to indicate the maximum per diem rate that can be used without treating part of the per diem wage as an extra allowance. (“Employment Law,” 2011, p. 263) Per Diem rates should not vary between employees and should be noted differently than regular wages. (“Employment Law,” 2011, p. 264)
In summary, in order for a contractor to be eligible to receive a per diem apart from a regular wage the per diem must:
1. Be based on an assignment or project that is expected to be completed in one year or less
2. Be based on living expenses from an entire day (not based on hourly services)
3. Not be associated with the number of hours worked in a day
4. Be reasonably related to expenses actually paid by the contractor
5. Not be paid to a contractor who lives close to where the work is being performed
*Disclaimer: This article was written with the intention of providing guidelines for Per Diem Laws but in no way should be construed as legal advice. Please contact an Attorney for legal counsel regarding Per Diem Laws.
American Staffing Association. (2011). Employment Law for Staffing Professionals (12th ed.). Alexandria, VA.