Travel Expenses – Per Diem Methods
When an employee travels for the company the question often arises as to how to best take care of the associated costs. By far the easiest and most efficient tool is using one of the accepted per diem methods advocated by the Internal Revenue Service. As the human resources director it is up to you to communicate the respective definitions and values to the employee so that there is no misunderstanding.
There are three methods acceptable to the Internal Revenue Service. They are:
- Meals and Incidental Expenses (M&IE) only, OR
- Lodging Plus Meals and Incidental Expenses, OR
- Incidental Expenses only
These three methods allow the employer to deduct the per diem amount so long as the business trip is substantiated with proper records for the time frame, place and business purpose. The efficiency comes into play related to keeping records for the related costs i.e. lodging, meals and incidental expenses. Before explaining the three acceptable methods this article defines the three distinct expenses.
- Lodging – an overnight stay away from the employee’s tax home required as a function of employment. Stay must be at a qualified lodging facility and the stay cannot provide any significant personal pleasure for the employee. The local lodging tax is considered a separate reimbursable miscellaneous item and not a cost of lodging.
- Meals – one of the three primary sustenance sittings customarily conducted on a daily basis. Meals cannot be extravagant nor lavish (delivered in theme format like a luau). The IRS does allow for excessive meals but up to a limit; any value in excess of this limit is nondeductible or unallowed.
- Incidental Expenses – incidental expenses include fees and tips related to hotel staff, tips paid to porters or baggage carriers.
You will notice the three methods are exclusive of each other. Basically you may not combine two methods. You must use one of the three methods for each respective trip. The following explains the three methods and the most likely situation to use the method.
Incidental Expenses Only
In some situations an employee is tasked with showing up at some form of a convention or presentation in a location far from home. In essence it is a one day affair. The employee flies out in the morning, attends the conference and comes back that night. The conference provides a lunch for your employee so the meal issue is mute. Incidental expenses would include the employees tips for transporting any baggage or possible a tip to a porter.
In general the employer may use a standard $5 per day deduction by handing the employee the $5 and the employee only needs to keep personal records of how the $5 is used. The business takes the $5 as a deduction. You cannot use this method if you decide to use the meals and incidental expenses method described next.
Meals and Incidental Expenses Method (M&IE)
In the example above, the trip was restricted to one day. Most trips extend beyond one day and so another method is used. This is the meals and incidental expenses method commonly referred to as M&IE. Here the incidental expenses are combined with the meal allowance for one single value. The daily allowance covers all three meals and that $5 value for incidental expenses.
This method is the most commonly used method as many employers prearrange travel and lodging for their employees. Thus the only issued to be addressed is sustenance for your employee. I highly encourage employers to take care of the lodging in lieu of the employee and focus on this simple method. The employee should be aware that they should keep records of how these funds are used.
The standard meal allowance recognized by the IRS is $46 per day. This value does change and is higher for your more expensive cities. I encourage you to use the schedule that is updated by the federal government via this website: www.gsa.gov/perdiem .
The meals portion of this method covers the respective meals, beverages, taxes and the tip paid to your server.
The government uses the following breakout for the M&IE:
This method is very effective when the lodging is prearranged and paid by the employer. Transportation is addressed separately so the only issue with the employee or payee (such as an independent contractor) is the meals and associated incidental expenses. Sometimes though the travel arrangements or timing is out of control by the employer and therefore lodging cannot be addressed prior to departure. In this situation the best method is the per diem for lodging plus meals and incidental expenses.
Lodging Plus M&IE Method
The allowance for this method is based on the location for the overnight stay. The IRS uses the terms CONUS and OCONUS. Basically CONUS is the continental United States and OCONUS is outside the continental United States. There are two different allowance amounts depending on the destination. Naturally most trips are within the lower 48 states. Foreign travel has a separate schedule.
The rates change in each city for each month due to tourism and other major annual events. Therefore there really isn’t any set rate that is universal. Please look up the location at the http://www.gsa.gov/perdiem website to get your value.
For example, I looked up Boston, MA and for the month of July in 2015 the per diem amount is $281 per day. This covers lodging, meals and the associated incidental expenses. The M&IE portion for this value is $71 leaving $210 for the lodging element.
The employer does not have to have the actual receipts from the employee related to this travel. However, I encourage the employer to at least get the lodging receipts from the employee to vouch the trip for internal auditing purposes.
Don’t forget the lodging taxes are paid separately and are not a function of lodging and M&IE. This lodging tax is considered a separate reimbursable expense for the employee. This is just another reason to get the lodging receipt from the employee.
Summary – Per Diem
Pub 463 is another resource for the reader if you desire to learn more. This article is an introduction to the three acceptable methods used by the IRS related to travel expenses for the employee. Most employers prepay the employee separately prior to departure and simply request a copy of the lodging receipt for verification of travel. Using these methods keep the documentation requirements down and assists in reducing any discrepancies between the employer and the employee related to travel. Act on Knowledge.
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