How Per Diem Payments Can Simplify Your Accounting and Taxes Take advantage of these tax-saving moves for your small business.
By Vlad Rusz Edited by Russell Sicklick
Opinions expressed by Entrepreneur contributors are their own.
Due to the current pandemic, business travel has decreased dramatically. No more large conferences, trade shows, or company retreats. But although travel has declined, it hasn't stopped, and some industries like transportation and shipping have even seen a surge in demand from the massive uptick in online shopping.
Zoe recently returned from a business trip, and in an effort to be as contactless as possible, vendors were supposed to email receipts. The emails never arrived and Zoe had trouble filling out her expense reports. When discussing her complication with a colleague from another company, he was surprised she used an expense report; he gets paid a per diem amount and isn't required to turn in receipts.
Not only a record-keeping nightmare, business travel expense reports also don't incentivize employees to be frugal with company money. As well, expense reporting can distract employees from their job by instead having to focus on documenting each expense. And, if employees don't provide expense reports, they are responsible to pay tax on the money.
There's an alternative system that can benefit everyone involved when implemented correctly. When employees are traveling, businesses have the option to pay them a per diem, or daily rate. This approach eliminates the need for both expense reports and supervision of travel spending. Here are some tips and strategies to help implement per diem travel payments in your business:
Related: Tax Deductions 2018: 42 Tax Write-Offs You May Not Know About
Max per diem rate
The GSA sets the federal per diem rates. These are the maximum rates that the IRS will let your business deduct. If your regular business travel is above this line, per diem won't benefit your business. A business isn't required to pay this rate; if your travel is less extravagant then your business can set lower per diem rates.
Tax-free payments
When a business pays an employee a flat rate for travel, the entire amount is tax deductible for the business and not taxable to the employee, assuming you don't exceed the GSA rates. This is a great, tax-free way to compensate employees while providing them extra tax-free compensation if they are economical with travel expenses.
Tax-free wages
For employees that travel often or for extended periods of time, this is a great way to get tax-free income. Specifically, travel nurses and truck drivers can earn a significant amount in tax-free wages if they get paid per diem along with their regular wages.
No expense reports
Unlike reimbursing for travel expenses, paying per diem rates don't require any expense reports. This simplifies the accounting process for everyone. The business pays a flat rate per day and the employee receives a fixed amount which they choose how to spend. No tedious paperwork to fill out and account for.
After the recent trip, Zoe approached her accounting manager about getting a flat per diem rate instead. Of course, this had been discussed before but never implemented. Zoe was able to come to an agreement to get a flat rate. She's quite pleased as she usually spends less than her budget, and this way she can earn some extra tax-free money while on business trips.
The current slump in travel is a great time to reevaluate your business travel policies and decide how to implement per diem into your travel reimbursement/compensation strategy. There are many factors to consider, among them is employees' reaction to changes in policy. Per diem is one more tool that businesses have to optimize their accounting system and maximize profits.
Related: Employee Compensation Structure Ensures Business Growth, Says This CEO
