As a business owner, you are aware of the challenges that come with managing employee business travel expenses. The process of documenting and reimbursing these costs can be a time-consuming and frustrating task. However, there is a solution that can simplify the entire procedure. The IRS, in its recent Notice 2023-68, introduced the fiscal 2024 special “per diem” rates, effective from October 1, 2023.
These rates provide a streamlined method for substantiating lodging, meals, and incidental expenses incurred during business travel, and they could be the answer to your reimbursement headaches.
Understanding the Per Diem Method
The per diem method is an attractive alternative to painstakingly tracking and documenting actual business travel expenses. It offers fixed travel per diems, which are established by the IRS and vary by location. One of the key aspects of this method is the “high-low” system, which simplifies recordkeeping.
Under the high-low method, the IRS designates an annual flat rate for locations with higher costs of living, such as major cities like Boston and San Francisco. Any location not listed as “high cost” within the continental United States is automatically considered “low-cost.” Some locations, like resort areas, may be considered high cost only during specific times of the year.
In certain situations where employers provide lodging or cover hotel expenses directly, employees may receive per diem reimbursement only for meals and incidental expenses. There is even a special $5 incidental-expenses-only rate for employees who do not incur meal expenses during a day or partial day of travel.
Reduced Recordkeeping and Taxation
One of the significant advantages of utilizing per diem rates is the reduction in recordkeeping requirements. Unlike the traditional method, employees are not required to retain receipts for expenses. However, they still must substantiate the time, place, and business purpose of their travel. Furthermore, per diem reimbursements are typically not subject to income or payroll tax withholding and are not reported on an employee’s Form W-2.
2023 Per Diem Rates
For travel after September 30, 2023, the per diem rate for all high-cost areas within the continental United States is $309. This rate is composed of $235 for lodging and $74 for meals and incidental expenses. For all other areas within the continental United States, the per diem rate is $214 for travel after September 30, 2023, consisting of $150 for lodging and $64 for meals and incidental expenses. When compared to the previous fiscal year, the high-cost area per diem increased by $12, and the low-cost area per diem increased by $10.
Important Considerations
While the per diem method offers significant benefits, it is subject to specific rules and restrictions. For instance, if your company adopts the high-low method for an employee, you must use it consistently for all business travel expense reimbursements within the continental United States during that calendar year. However, when it comes to travel outside the continental United States, you can use any permissible reimbursement method.
Important Rules: During the last quarter of the calendar year, employers must continue using the same method (per diem or high-low) for an employee as they did during the first nine months of the year. It is crucial to note that per diem rates cannot be paid to individuals who own 10% or more of the business.
If your employees are frequently on the road, it might be the perfect time to consider the per diem method for simplifying business travel expense reimbursements. It not only reduces the time and frustration associated with traditional reimbursement processes but also ensures compliance with IRS regulations. If you need further information or guidance on implementing the per diem method in your business, do not hesitate to reach out to us.
You can also refer to the official IRS notice (Notice 2023-68) for additional details. By making this transition, you can streamline your business travel expense management and make life easier for both your employees and your financial team.
For more information, contact your Accavallo & Company team member. You may also contact our office at (203) 925-9600 or @[email protected]
