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BUSINESS OF
MEDICINE

THE PROBLEM

WITH PER DIEMS

By Kathleen Barrow, Circle of Friends member

Federal tax law now prevents taxpayers from deducting business Clearly per diem allowance programs can be beneficial, but they can
expenses incurred in connection with services rendered as employ- also be problematic. So, you ask, “How does an employer do it right?”
ees. As a result, we expect employers to be directly paying a greater
number of expenses incurred by employees in service to the em- The Tax Requirements
ployer. Direct payment of business expenses is also increasing be- Code section 62(c) requires business expenses to be substantiated,
cause employers are finding it lucrative to provide “mobile” services and excess amounts returned to the employer in a reasonable period
to clients. Nationally and internationally, employers now provide of time, in order to avoid reimbursements from being treated as
services via employee physicians, nurses, pulmonary technicians, wages. Treas. Reg. §§1.62-2(b)(2), 3121(a)-3(a). For a per diem al-
home health care aids, engineers, truck drivers and others who travel lowance to satisfy this criteria the payment must: (i) reimburse or-
away from home to work. In fact, one website for “traveling nurses” dinary and necessary business expenses for travel away from home;
I found when researching this article speaks to the “special perks” (ii) be reasonably calculated not to exceed the amount of expenses
that can be obtained by nurses who travel to “vacation spots” they anticipated to be incurred; and (iii) be paid at or below the daily fed-
can enjoy when not spending time rendering services to clients. eral published rate applicable to the location of travel (for meals
All of this increases employers’ interest in using per diem al- and incidentals, or lodging), at a flat rate, or via a specified schedule.
lowances to facilitate reimbursement of the costs of meals, lodging Rev. Proc. 2011-47.
and incidental expenses associated with employee travel. A “per Further, no matter what method of determining the amount of
diem allowance” is a payment for ordinary and necessary business per diem is used, the expenses must be “substantiated,”— meaning
expenses that an employer reasonably anticipates will be incurred that documentation must be maintained by the employer that shows
by an employee for travel away from home in service to the em- the amount of the expenses, the business purpose of the expenses,
ployer. Per diem allowances are attractive to traveling employees be- and the date and time the expenses were incurred. Code § 274(d)(1).
cause they typically receive the money in lump sum “up front,” and To put it simply, any sums in excess of what can be substantiated,
do not have to worry about advancing their own funds or tying up are treated as wages under the Code. A per diem allowance method
their own credit cards for business-related travel. of reimbursing employees is not intended to qualify as a “free pass”
However, the problem with per diem allowances is that they can to a vacation destination. Thus, an employee who spends time en-
be excessive or abusive. For example, in one case I had years ago, joying the beach in Southern California must reimburse the employer
the client’s engagement letter to a new surveying technician ex- for lodging and meals during time off, or take the value of such lodg-
pressly stated “you will receive 40 percent of your compensation in ing and meals or incidentals into wages. In an audit, the burden is
per diem payments.” The per diem payments (in the aggregate) were on the employer to make sure that whatever amount of per diem al-
labeled “business equipment and tools” on the client’s tax returns. lowance is paid to an employee is “substantiated” as provided in
Clearly all this left the client and employees exposed to liability for guidance published under Code § 274(d)(1). Rev. Proc. 2011-47.
unpaid income and employment taxes, but there were other liabili- In sum, while per diem reimbursements are lawful under the
ties that were not anticipated. Code, per diem amounts must be supported with documentation
The payment of per diem amounts that were actually “wages,” of actual expenses incurred, and reasons for the business travel to
rather than substantiated expense reimbursements, raised the non- which they relate. Any employer using the per diem method of re-
exempt technician’s “regular rate” for purposes of calculating over- imbursing expenses is wise to develop policies and procedures for
time pay. Money characterized as per diem allowances, rather than how they will be used.
“wages” caused the technician and other employees to be denied
the opportunity to make elective deferral contributions to the 401(k) Kathleen Barrow is a partner with Constangy, Brooks, Smith &
plan. This resulted in an operational failure potentially disqualifying Prophete LLP in San Antonio. She can be reached at
the plan. What a colossal mess! kbarrow@constangy.com.

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