Tax Free Per Diem/Housing Reimbursements Question: What is Tax Free Reimbursement? Answer: An employer whose employees travel in the course of their work may reimburse their employees tax free for expenses incurred while the employee is traveling away from home on temporary assignment. Question: How much can a company reimburse for Per Diem and Housing? Answer: The IRS sets Maximum daily reimbursement rates that can be paid to an employee without exchange of receipts for lodging and meals during days that the employee is away from home on behalf of the employer. These rates vary by location depending on the local cost of living. Question: How can an employee qualify for Tax Free Reimbursement? Answer: Traveling nurses may qualify for tax free per diem reimbursement and/or housing allowances where they have a valid permanent taxable residence which is not in the same area (reasonable driving distance) from their assignment and they are away from home on a temporary assignment which is not considered indefinite by the tax authorities. Question: Can a company legally lower an employee’s pay rate in order to offer tax free reimbursements to employees? Answer: Tax free per diems and housing allowances must be for reimbursement for costs associated with being away from home for the employee. They MUST be for over and above the regular wages associated with the position for which the employee is being compensated. This means that a company cannot legally lower an employee’s pay rate in order to offer them tax free reimbursements. If an employee can not substantiate (with evidence) the need for reimbursement the IRS would consider the additional compensation received as taxable to the employee. Question: What may tax authorities look for when reviewing compensation for proper tax treatment? Answer: If taxable wages paid to an employee are clearly below the national and local average (for example, $10/hour for a Registered Nurse would clearly fall well below the national average) then this could be considered wage re-characterization (designed to avoid payroll taxes) and the employee as well as the company could be prosecuted for tax evasion. Question: Besides putting me at risk for an audit, what other pitfalls are there in being compensated by an aggressive wage re- characterization scheme? Answer: If a company lowers an employee’s taxable wages for the purpose of paying the employee less taxable and more non taxable reimbursement then any overtime worked would be paid at the much lower pay rate thus the employee would earn less. Also, your legally reported wages would be extremely low, meaning you will qualify for less Social Security at retirement and may have difficulty obtaining loans or mortgages. Finally, Disability payments are based upon taxable wages only, so those payments would be negatively impacted as well. Question: Why may companies offer illegal plans? Answer: Companies that offer employees illegal wage re-characterization programs are saving by not having to pay the additional cost of FICA associated with taxable wages and also by paying overtime wages to the employee at a much lower rate and billing the client at a much higher rate. Question: Is there a legal way I can take advantage of these types of deductions for per diem? Answer: Yes, qualifying travel and lodging related expenses may be deductible on your federal or state tax return; however, you should consult your tax preparer. This sheet is not meant to be tax advice you should always consult a tax professional for questions regarding tax issues.
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