Our tax expert responds to a common question we receive from motor carriers.
No, the treatment of per diem as a portion of an employee’s wages has been unique to the transportation industry since at least 1989 and is not considered an improper “wage reclassification” for the foregoing reasons.
The industry has for over for 30 years reclassified a portion of a driver’s cent-per-mile pay as non-taxable meals and incidental expenses per diem. However, this per diem method was not accepted by the IRS until the Special Transportation Industry substantiated per diem method was introduced in 2000, which among other things:
- Established $40 as the federal meals and incidental expenses rate for trucking.
- Increased the tax-deductible percentage of transportation employee travel expenses to 60%[i], and
- Approved the cent-per-mile method as an acceptable alternative and industry standard prior to December 12, 1989[ii].
- Required a fleet using cent-per-mile method to audit their per diem plan not less than monthly to insure the amount of reimbursement was equal to the lesser of the total per diem allowance paid for the month or number of days a driver was away from home multiplied by the federal M&IE rate[iii].
Substantiated Example: A truck driver employee travels away from home on business for 24 days during a calendar month. A payor pays him the $66 special trucking daily allowance (meal and incidental expenses only). The amount deemed substantiated is the total per diem allowance paid for the month or $1,584 (24 days away from home at $66 per day).
Cent-Per-Mile Example: A truck driver employee is paid a 10 cents-per-mile per diem allowance (meal and incidental expenses only) based on the number of miles driven. Taxpayer travels away from home on business for 24 days but only drives for 20. Driver’s employer pays an allowance of $1,000 for the month based on 2500 miles per week. The amount deemed substantiated is the full $1,000 because that amount does not exceed $1,584 (24 days away from home at $66 per day).
Thirty years of IRS guidance and legislative history specifically reference an employer paying a driver in the transportation industry under the substantiated method and, therefore, contemplate that some portion of a driver’s wages will be treated as per diem[iv] . Prior to passage of the 2017 Tax Cuts and Job Act employee truck drivers who did not participate in a company-paid program could reclassify a portion of their wages as tax-deductible, unreimbursed employee business expenses, including meal & incidental expenses, on Schedule A of Form 1040[v].
Which provides the largest benefit to a fleet and driver, substantiated or cent-per-mile?
Decades before the advent of TMS software, telematics and ELD’s fleets adopted cent-per-mile per diem for reimbursable employee travel expenses because it was easy to calculate and substantiate using trip sheets[vi]. However, there is no correlation between the miles a driver travels and frequency of meal breaks. Under the cent-per-mile method a driver is paid only for miles driven and not nights away from home. Although, a driver may travel 500 miles one day but only 200 miles the next, the distance traveled does not affect the need to eat 3 meals a day.
The IRS introduced the Special Transportation Industry substantiated per diem to simplify tax compliance for fleets by relying on days away from home instead of miles traveled. This method accurately reflects the number of meals a driver eats and resolved the problem that driver’s regularly travel away from home and stop during a single trip at localities with differing federal M&IE rates.
- The most beneficial aspect to a driver is that substantiated method at $66/day yields on average 45% more per diem than cent-per-mile.
- Substantiated per diem can be earned during a 34-hour restart and unforeseen delays like detention, breakdowns, or weather.
- A typical driver will save an additional $1,100 – $1,400 in income and payroll taxes over cent-per-mile.
- Fleets that implement the Per Diem Plus FLEETS platform will save about 37% or $800 more per driver in reduced payroll and income taxes and workers compensation than cent-per-mile.
The transportation industry has been unique in its treatment of driver per diem for over 30 years. While, both the substantiated and cent-per-mile per diem methods are IRS-compliant, neither method has been considered a wage reclassification for 30 years. However, a motor carrier that adopts the substantiated per diem method that is built into Per Diem Plus FLEETS will realize the most benefit for both the fleet and their drivers.
[i] The raised the deductible percentage of employee travel related expenses to 80% in 2008
[ii] Federal Register-1989-12-12 Vol 54 Page 51038 pursuant to “Family Support Act of 1988”.
[iii] Rev. Proc. 2000-39, Refer to Tres. Reg. 1.62-2T (1989)
[iv] Rev. Proc. 2011-47 § 4.04(4)
[v] IRC 62(a)(2)(A), Rev. Proc. 2011-47 § 2.05
[vi] 1-274-5T(c) Rules of substantiation, Rev. Proc. 2011-47 § 4.02(5)