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The do's and don'ts of qualified per diem allowances
Reimbursing and substantiating business travel expenses can be cumbersome and time-consuming, Taxand USA explores the do's and don'ts of qualified per diem allowances.
A principal benefit of using per diem rates is the more lenient recordkeeping requirements. Receipts are usually not required under the per diem method. Instead, the company simply pays the allowance to the employee, who must substantiate the time, place and business purpose of the underlying travel. Additionally, qualified per diem reimbursements generally aren’t subject to income or payroll tax withholding and are not reported on an employee’s Form W-2.
Merely implementing a per diem plan does not in and of itself make such payments tax-free to employees. A per diem plan must be a qualified per diem plan in order for the per diem payments to be paid tax-free. Failure to properly administer a per diem plan that is intended to be qualified will have adverse tax implications for both employees and the employer.
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Qualified per diem plans are an excellent way to reduce the administrative burden of travel expense reimbursements and payroll tax reporting and withholding. Both employers and employees should keep the aforementioned information in mind while implementing a qualified per diem allowance plan.