Money Matters: Understanding Per Diems For Tax Returns
January 1, 2010
What exactly is per diem? We hear the term all of the time and we sort of know it has something to do with taxes, but what does it really mean. Here is a definition of per diem, and then I’ll explain how it is used in the transportation industry.
Per Diem is Latin for “per day” or “for each day”. It usually refers to the daily rate of any kind of payment. It may also refer to a specific amount of money that an organization allows an individual to spend per day, to cover living and traveling expenses in connection with work. It is the allowance given to the employee/worker for completing a task or going on tour away from home.
In the trucking industry, there are two separate uses for per diem. You can get paid per diem from your employer, or you can deduct per diem on your tax return, or sometimes both. Let’s start with an explanation of how per diem works for owner operators. As an owner operator, you will never be paid per diem. You will always deduct per diem on your tax return. The rules for deducting per diem are the same for both owner operators and employee drivers. The method for deducting them on your tax return however is different, and I will cover both. First, in order to qualify for per diem, you must be traveling away from home, and you must be away from home long enough to be required to sleep away from home. This is a very common occurrence in our industry. If you take a trip that is out and back, meaning you don’t show any off duty time or sleeper berth time on your logs, then you do not qualify for per diem for that trip. You will always use your logbooks as proof of your per diem deductions.
Deducting per diem is pretty straightforward. We need to know how many days you traveled away from home for the entire year. Go through your logbook and tally up the days. Count days that you leave for a trip and days that you return from a trip as 3/4 days. If you leave on Monday and return on Friday you would qualify for 4 and 1/2 days of per diem. Monday is 3/4, Tuesday, Wednesday, and Thursday are all full days, and Friday is 3/4. You then multiply it by the current IRS per diem allowance, which is $52 per day for all days between January 1st 2009 and September 30th 2009, and $59 per day, for all days from October 1st 2009 through December 31st 2009. (The IRS rate changed on October 1st of 2009).
Let’s say you traveled a total of 245 days for calendar year 2009. Let’s say 183 were in the first 3 quarters. 183 times $52 is $9,516. The other 62 days were in the 4th quarter when the rate was higher. 62 times $59 is $3,658. Add the two together and your total per diem for 2009 is $13,174. This is the total per diem that you will report on your federal tax return. It will be adjusted for the allowable percentage (80%) on the tax return, but don’t let that confuse you now. Your tax preparer should understand and be able to handle that on the return. Speaking of which, you may want to get a second opinion on your tax return, as many tax preparers are not familiar with how per diem should be handled for an over the road driver. Owner Operators will report this deduction on Schedule C and employee drivers will use Schedule A and form 2106. Again, your preparer should handle this.
Now, let’s move to the second issue surrounding per diem and how it is used in our industry. Over the last several years, many trucking companies have started paying their drivers a “per diem”. Even though per diem means per day, carriers are paying a mileage rate to cover per diem. The IRS has allowed this as long as the total amount doesn’t exceed the total per diem that the drivers qualifies for based on the days traveling away from home. There are advantages and disadvantages to receiving per diem pay in place of straight mileage pay.
Some advantages are:
• No income tax paid
• No Medicare tax paid
• No social security tax paid
Those are all taxes that would have come out of your pocket if you would be paid a mileage wage instead of per diem, so you essentially take home more money from per diem pay than you do from mileage pay.
Some disadvantages are:
• Less money paid into social security and Medicare could reduce your benefits
• Less money paid into unemployment could reduce your benefits
• Less money paid into workers compensation could reduce your benefits
• Less money showing on your W-2 as wages could limit your ability to borrow for a mortgage
In addition to those disadvantages, many carriers will reduce overall pay by as much as two cents per mile to cover what they call, an “administration fee” for a per diem program. It also helps make up for the fact that wages are 100% tax deductible for a carrier but per diem is limited. Regardless of why the carrier lowers the wage, it comes down to each individual driver to decide whether or not a per diem program makes sense for him or her.
Unfortunately there is no one size fits all answer for whether or not you should take part in a per diem program or not. You really need to sit down with a qualified tax preparer who understands the issue and calculate your tax return both ways to see which will benefit you. I have calculated hundreds of tax returns both ways and it really just depends on the individual situation. In general, I could say that if you are able to receive part of your pay as per diem and the carrier does not lower overall pay, then you will benefit from lower taxes. If the carrier takes one cent away from overall pay, you will probably still benefit; but again, check with your tax preparer. Most tax returns I’ve calculated with a two-cent reduction in pay just don’t show enough benefit to overcome the disadvantages.
Everyone’s tax situation is different. You need a qualified tax preparer that really understands the trucking industry to help you with this issue and all others pertaining to your tax situation. Being subject to DOT hours of service regulations changes the way your federal income tax is handled and most local tax preparers don’t understand or stay informed of the regulations. •