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This article is in response to client questions regarding wages and per diem allowances.  What is taxable?  What is non-taxable?  What are the rules regarding substantiation of per diem allowances?

WITHHOLDING

Withholding of income tax by an employer is required on each of an employee’s wage payments. Generally, the term “wages” includes all remuneration for services performed by an employee for an employer. LK:NON: TPC-IRC S3401(A) Salaries, fees, bonuses, commissions on sales or on insurance premiums, taxable fringe benefits, pensions and retirement pay are, if paid as compensation for services, subject to withholding.
Retroactive wages and overtime payments under the Fair Labor Standards Act are subject to withholding, although payments under the Act for liquidated damages are not.
The basis used in determining compensation, whether piecework, percentage of profits, hourly rate, or fixed salary, is immaterial. Overtime, vacation allowances and dismissal payments are wages subject to withholding, as are Christmas gift merchandise certificates given to employees.

PER DIEM ALLOWANCE

The term “per diem allowance” means a payment under a reimbursement or other expense allowance arrangement that meets the requirements specified in the Code LK:NON: FED01 S1.62-2(C)(1) and that is -
(1) paid with respect to ordinary and necessary business expenses incurred, or which the payor reasonably anticipates will be incurred, by an employee for lodging, meal, and incidental expenses, or for meal and incidental expenses for travel away from home in connection with the performance of services as an employee of the employer,
(2) reasonably calculated not to exceed the amount of the expenses or the anticipated expenses, and
(3) paid at or below the applicable federal per diem rate, a flat rate or stated schedule, or in accordance with any other Service-specified rate or schedule.
PER DIEM SUBSTANTIATION
Per diem allowance.

If a payor pays a per diem allowance in lieu of reimbursing actual lodging, meal, and incidental expenses incurred or to be incurred by an employee for travel away from home, the amount of the expenses that is deemed substantiated for each calendar day is equal to the lesser of the per diem allowance for that day or the amount computed at the federal per diem rate for the locality of travel for that day.
Meal and incidental expenses(M&IE) only per diem allowance.

If a payor pays a per diem allowance only for meal and incidental expenses in lieu of reimbursing actual meals and incidental expenses incurred or to be incurred by an employee for travel away from home, the amount of the expenses that is deemed substantiated for each calendar day is equal to the lesser of the per diem allowance for that day or the amount computed at the federal M&IE rate for the locality of travel for that day (or partial day). A per diem allowance is treated as paid only for meal and incidental expenses if (1) the payor pays the employee for actual expenses for lodging based on receipts submitted to the payor, (2) the payor provides the lodging in kind, (3) the payor pays the actual expenses for lodging directly to the provider of the lodging, (4) the payor does not have a reasonable belief that lodging expenses were or will be incurred by the employee, or (5) the allowance is computed on a basis similar to that used in computing the employee’s wages or other compensation.
Optional method for meal and incidental expenses only deduction.

In lieu of using actual expenses in computing the amount allowable as a deduction for ordinary and necessary meal and incidental expenses paid or incurred for travel away from home, employees who pay or incur meal expenses may use an amount computed at the federal M&IE rate for the locality of travel for each calendar day (or partial day) the employee is away from home. This amount will be deemed substantiated LK:NON: FED01 S1.274-5 , provided the employee or self-employed individual substantiates the elements of time, place, and business purpose of the travel for that day.
Rates.

A taxpayer can use a flat rate of $52 per day as the federal M&IE rate for any CONUS locality of travel, and $58 per day as the federal M&IE rate for any OCONUS locality of travel.
HIGH-LOW SUBSTANTIATION METHOD
If a payor pays a per diem allowance in lieu of reimbursing actual lodging, meal, and incidental expenses incurred or to be incurred by an employee for travel away from home and the payor uses the high-low substantiation method, the amount of the expenses that is deemed substantiated for each calendar day is equal to the lesser of the per diem allowance for that day or the amount computed at the rate.  This high-low substantiation method may be used in lieu of the per diem substantiation method provided but may not be used in lieu of the meal and incidental expenses only substantiation method or the incidental expenses only substantiation method.
Specific high-low rates.

The per diem rate is $246 for travel to any “high-cost locality” or $148 for travel to any other locality within CONUS. The high or low rate, as appropriate, applies as if it were the federal per diem rate for the locality of travel. For purposes of applying the high-low substantiation method LK:NON: IRC-FILE S274(N) on meal expenses, the federal M&IE rate shall be treated as $58 for a high-cost locality and $45 for any other locality within CONUS.
High-cost localities.

News Orleans is the only high-cost locality in Louisiana or Mississippi.

NO DOUBLE REIMBURSEMENT OR DEDUCTION.

If a payor pays a per diem allowance in lieu of reimbursing actual lodging, meal, and incidental expenses or for meal and incidental expenses, any additional payment with respect to those expenses is treated as paid under a nonaccountable plan, is included in the employee’s gross income and is reported as wages or other compensation on the employee’s Form W-2
LK:NON: FED01 S1.62-2(H)(2)(I If a payor’s reimbursement or other expense allowance arrangement evidences a pattern of abuse of the rules LK:NON: IRC-FILE S62(C) and the regulations thereunder, all payments under the arrangement will be treated as made under a nonaccountable plan. LK:NON: FED01 S1.62-2(K) These payments are included in the employee’s gross income and are reported as wages on the employee’s Form W-2.

Ronnie Gagnet is a Certified Public Accountant and a partner in the tax division of Hannis T. Bourgeois, LLP.  He has a specialization in the construction industry and has 24 years of experience in public accounting.  Mr. Gagnet has been a guest lecturer at LSU on corporate taxation and has been a speaker at numerous industry conferences and civic organizations.  His articles on taxation have been published in various local and national periodicals.  He can be reached at rgagnet@htbcpa.com.