Per diems can no longer be claimed as an unreimbursed business expense. Companies must be careful to avoid wage recharacterization as they comply with the law.
The trucking industry is in a bit of a frenzy over tax reform and per diems, and there’s a lot of misinformation being circulated. This has led to some confusion about whether drivers are still allowed to take per diems (they are) and what employers and drivers must do to comply with the related provisions of the Tax Cuts and Jobs Act.
Before I clarify what’s permissible and what isn’t, as well as how trucking companies can avoid wage recharacterization (a big no-no with the IRS), it’s helpful to know about per diem rules and how they have worked in the past.
IRS guidelines for per diems
For per diems to be used in accordance with the IRS guidelines, it’s important for trucking companies to have an accountable plan in place. That plan must ensure that per diems only cover business expenses, that all expenses must be substantiated within a reasonable amount of time, and that the driver-employee is required to return any excess payment back to the employer within a reasonable amount of time after receiving it.
As an example, consider a trucking company that pays its drivers per diems at a rate of 10 cents per mile. If a driver travels from Minneapolis to Dayton (roughly 700 miles) and is away from home for the night, then the driver would be paid a per diem of $75. Since IRS Notice 2018-77 set the per diem rate of $66 per day for travel in the continental United States, the driver must return $9 to the employer as an excess payment. If the driver does not return the $9, it should be treated as a taxable payment and included on his or her W2.
How per diems were used prior to the new tax law
Before the passage of tax reform legislation, there were three ways per diems could to be taken:
- A common carrier would pay its company drivers a per diem for nights they were away from home. The per diem could be in the form of a flat dollar amount or based on miles driven. That per diem amount was nontaxable to the driver, and the common carrier would get an 80 percent tax deduction for it.
- A common carrier would not pay its company drivers per diems. These drivers could claim a per diem (typically $63 per day) as an unreimbursed business expense on Schedule A, which was subject to the 2 percent adjusted gross income limitation.
- Independent contractors or owner-operators would claim a per diem (typically $63 per day) as a business expense (presumably on Schedule C).
Per diems can no longer be claimed as an unreimbursed business expense
The new tax law does not affect scenarios #1 and #3 above. Trucking companies can still pay their drivers a nontaxable per diem and take a business deduction for it. And owner-operators can continue to take a per diem to the extent they are away from home.
Scenario #2, however, has been eliminated. To help pay for the law’s tax cuts, Congress did away with a variety of itemized deductions for individuals, one of which is the “2 percent miscellaneous itemized deductions,” where a driver could claim per diems as an unreimbursed business expense. Because this is no longer allowed, by extension scenario #2 has become obsolete.
Avoid wage recharacterization in paying per diems
Trucking companies should be careful to avoid wage recharacterization, which is essentially reclassifying wages from taxable to nontaxable based on certain events or factors. The IRS does not allow wage recharacterization, which happens more frequently than you might imagine, especially when per diems are paid by the mile.
Let’s look at an example to illustrate how this happens:
Common Carrier A pays its drivers 40 cents per mile, along with a per diem at 10 cents per mile, for a total of 50 cents per mile. Common Carrier A has two drivers: John drives cross-country, while Tom drives locally and is home every night.
John drives 500 miles and is away from home for the night. Tom also drives 500 miles, but is home for the night. Common Carrier A pays John and Tom $250 each (500 miles at 50 cents per mile) for the day. Common Carrier A allocates $50 as a nontaxable per diem to John — which constitutes the recharacterization of John’s wages because it has been treating 50 cents per mile as base pay instead of the 40 cents per mile it intended. This is because Common Carrier A paid its drivers 50 cents per mile whether they were away from home or not. This is an example of a nonaccountable plan, and the $50 paid to John should be taxable to him.
In a similar scenario, John and Tom each drives 500 miles, with John being away from home for the night and Tom driving locally. Common Carrier A paid John $250 and Tom $200 for the day. Common Carrier A has correctly allocated $200 (40 cents per mile) as taxable and $50 (10 cents per mile) as nontaxable for John. Common Carrier A also correctly paid Tom $200 (40 cents per mile) and followed an accountable plan by paying drivers 40 cents per mile and an additional 10 cents per mile only if they are away from home for the night.
How we can help
Per diems are a hot topic with drivers. Be sure you understand how they work and how you can use them to your advantage to attract and retain drivers, as they are a crucial part of your business.
CLA’s trucking and transportation professionals can work with you to assess the new law’s impact on your business and help you put an accountable per diem plan in place.