Per Diem Rates

Ministry employers who help their employees cover business travel expenses have two basic options: (1) pay employees the precise amount of their expenses, or (2) opt for convenience and pay a set “per diem” allowance for each day of business travel.

Per diem allowances that stay within IRS-approved rates satisfy the tax law’s accountable plan requirements almost automatically. All the employer has to do is obtain records of when, where, and why the employee made the trip within a reasonable time—no later than 60 days after the travel date.

Another advantage of per diem allowances is that the employee does not have to keep receipts or account for actual dollars spent. In addition, per diem amounts are not reported to the IRS. Therefore, the payments do not increase income on Form W-2.

Employers can opt for a two-tier set of “high-low” reimbursement rates, or they can tie tax-free travel allowances to the amount the federal government provides to its employees for travel to a particular location. The standard method of replicating government-used per diems has many different rates for different cities. An employer must pick one of these methods for each employee. The “high-low” method is simpler than the government method because the employer does not have to track a multitude of per diem rates.

Per diem allowances apply to employer reimbursements. These rates may not be used to claim deductions for unreimbursed expenses. The high-cost areas are identified in IRS Publication 1542.

The federal per diem rate is the sum of the federal lodging rate and meals and incidental expenses rate. The rates for non-standard areas (NSAs) are available through the U.S. General Services Administration website.

Meals and incidental expenses (M&IE) are limited to “fees and tips given to porters, baggage carriers, hotel staff, and staff on ships.” Laundry, dry cleaning, lodging taxes, and telephone calls are no longer included in the definition of incidental expenses for per diem purposes. Therefore, any such expenses incurred can be claimed in addition to the M&IE rate as long as there are records to back them up.

These per diem rates may be used to claim deductions for unreimbursed lodging and meals and incidental expenses, but the actual cost of unreimbursed travel, such as transportation expense, must be substantiated.

Self-employed taxpayers can use the per diem rates for meals and incidentals, but they must show the time, place, and purpose for the travel in order to use them. Only 50% of the per diem is deductible—the same as business meals—even though a portion of the allowance covers incidental expenses.

Self-employed taxpayers cannot use per diems for lodging expenses. They must substantiate lodging expenses deductions.

 


This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.

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