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Is trucker per diem an improper wage reclassification?
Is trucker per diem an improper wage reclassification? No, the treatment of a portion of an employee’s wages as per diem has been unique to the transportation industry for over 30 years and is not considered an improper “wage reclassification”.
The IRS first introduced per diem (per day) allowances in Revenue Procedure 90-60 - a simplified method of substantiating employee business expenses - in accordance with the Family Support Act of 1988. The first published guidance for the transportation industry was issued in 1991 where, according to the IRS, a driver's weekly compensation earned on a cents-per-mile basis may be reclassified by amounts designated as per diem (i.e. $66/day) for meals and incidental expenses after determining how many days a driver was away from home overnight [TAM 9146003].
Related Article: Part II: Is Trucker Per Diem An Improper Wager Reclassification
Is there a special per diem for the transportation industry?
Yes. The IRS introduced the Special Transportation Industry substantiated per diem method 20 years ago in Rev. Proc. 2000-39, 2000-9 Sec. 4.04 [Notice 2000-48], which among other things:
- Established a method allowing a payor to treat a specific amount as paid or incurred for employee meals while traveling away from home for work instead of substantiating actual costs (no receipts required).
- Allowed self-employed and employee drivers [claiming per diem as an itemized deduction] to use substantiated method.
- Set $40 as the nationwide federal meals and incidental expenses (M&IE) rate for transportation employees subject to DOT hours of service. [Increased to $66 in 2018] [i]
- Increased the tax-deductible percentage of employee travel expenses to 60%. [Raised to 80% in 2008] [ii]
- Approved as a transportation industry standard prior to December 12, 1989 the treatment of a portion of a driver’s wages as per diem. [iii]
- Required a fleet using the cent-per-mile method to include a process that;
- tracks the amount of cents-per-mile M&IE allowance paid to a driver on a per diem basis,
- includes a mechanism to determine when allowances exceed the amount of expenses that may be deemed substantiated, and
- treat the excess allowance over $40 per day as wages for withholding or employment tax purposes. [Increased to $66 in 2018][iv]
- Established that all amounts paid under a per diem arrangement that meets the requirements of business connection, substantiation, and returning amounts in excess of expenses are treated as paid under an accountable plan and are excluded from income and wages.
- Well-known motor carriers that utilize substantiated per diem include Averitt Express, TMC Transportation, Transport America, Big G Express, Oakley Transport, Danny Herman Trucking and EPES Transport System.
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When did wage reclassification become a concern in trucking?
The 2017 Tax Cuts and Jobs Act eliminated per diem as an itemized deduction on drivers individual income tax returns. As a result, interest from employees in company-sponsored per diem plans swelled as drivers sought to offset the lost deduction [about $19,000 for an average OTR driver]. Since, drivers were prohibited from using the decades-old industry standard cent-per-mile per diem method, motor carriers embraced the parity to drivers substantiated per diem provided.
Unfortunately, they discovered the IRS never published a basic instructions for implementing a substantiated per diem program or payroll process for reclassifying a portion of wages to daily rate per diem. In fact, the last comprehensive guidance issued by IRS on substantiated per diem method was Rev. Proc. 2011-47, however, it was silent on wage reclassification for per diem. So too was the last relevant court case, Beech Trucking, Inc. v. IRS (USTC 2002). The only published guidance that referenced "wage recharacterization" could be found in the Rev. Rul. 2012-25.
Why did IRS issue Revenue Ruling 2012-25?
IRS issued Rev. Rul. 2012-25 in response to an emerging audit trend whereby businesses that did not historically offer per diem were implementing abusive per diem plans that recharacterized taxable wages as nontaxable reimbursements or allowances. Although unrelated to trucking the tax practitioner community, and especially those that offered cent-per-mile per diem audit services, elevated the ruling to misplaced prominence.
Is Revenue Ruling 2012-15 applicable to trucking?
No. Based on the foregoing Rev. Rul. 2012-25 is inapplicable to transportation industry:
- In 1991 IRS ruled in technical advice (TAM 9146003) that, "for purposes of FICA, FUTA and income tax withholding, a driver's weekly compensation may be reduced by amounts designated as a per diem allowance for meals and incidental expenses."
- A revenue ruling is the conclusion of the Service on how the law is applied to a specific set of facts. (Kristin Hickman, IRB Guidance: The No Man's Land of Tax Code Interpretation, 2009 MICH. ST. L. REV. 239 (2009)).
- The facts articulated herein do not parallel the transportation industry in application or practice.
- Motor carriers commonly vary compensation based on driver type - line-haul, regional and local - with drivers who travel away from home overnight being paid more than local drivers who sleep at home nightly.
- In three of the four situations listed in the revenue ruling the employer failed to fulfill the basic business connection requirement of the regulations.
- A line-haul driver subject to DOT HOS who travels away from home overnight does so exclusively for work.
Specific facts - the devil is in the details!
- Cable TV contractor offered a tool reimbursement that reduced hourly compensation that was offset with an hourly tool rate. Once a technician had received tool plan payments for the total amount of his or her tool and equipment expenses, the employer ceased paying the technician an hourly tool rate and increased the technician’s hourly compensation to the pre-tool plan hourly compensation rate.
- Nurse staffing contractor compensated all of the nurses on an hourly basis and the hourly compensation amount did not vary depending on whether the hospital was located away from the assigned nurse’s tax home. The employer treated a portion of the nurses’ hourly compensation as a nontaxable per diem allowance only when hospitals assignments required them to travel away from their tax home. This situation is like that in Beech Trucking where the company paid per diem to both over-the-road and short haul truck drivers who returned home nightly.
- Construction company’s workers were required to travel between construction sites or otherwise use their personal vehicles for business purposes. The employer paid all of its workers, including those who were not required to travel or otherwise use their personal vehicles for employer’s business, a flat amount per pay period that was treated as a nontaxable mileage reimbursement.
- Cleaning services company that employed cleaning professionals that provided their own cleaning supplies to perform house cleaning services. The employer properly adjusted hourly compensation and reimbursed employees only for substantiated clean supply expenses.
Why did these employer's run afoul of the IRS?
The employer’s cited in 2012-25 failed to fulfill the business connection requirement of the regulations because they took liberties with IRS published guidance and ignored the limitations set forth in Rev. Proc. 2011-47 Section 3.03(2) which states in part, “An allowance that is computed on a basis similar to that used in computing an employee's wages or other compensation does not meet the business connection requirement unless, as of December 12, 1989, (a) the allowance was identified by the payor either by making a separate payment or by specifically identifying the amount of the allowance, or (b) an allowance computed on that basis was commonly used in the industry in which the employee performed services.” Furthermore, neither cable contractors, nurses, construction workers or house cleaners enjoy industry-specific rules prescribed by the IRS Commissioner like those covering the transportation industry introduced in Rev. Proc. 2000-9 Section 4.04 that established the Special Transportation Industry per diem[i].
Trucker Per Diem Examples
1. 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 for 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). The employer treats $1,584 as a pre-tax deduction; calculated withholdings; adds per diem to payroll as a non-taxable reimbursement.
2. A truck driver is paid 45 cents-per-mile. The employer classifies 10 cents-per-mile to a per diem allowance based on the number of miles driven. He travels away from home 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). The employer calculates taxable wages at 35 cents-per-mile and per diem at 10 cents-per-mile as a non-taxable reimbursement.
Which per diem method provides the biggest benefit to drivers?
Although, a driver may travel 600 miles one day but only 100 miles the next, the distance traveled does not affect the need to eat 3 meals a day. As a result, substantiated per diem accurately reflects the definition of per diem in Rev. Proc. 2011-47 section 3.01: "Paid for ordinary and necessary business expenses the payor reasonably anticipates will be incurred, by an employee for meal and incidental expenses, for travel away from home performing services as an employee of the employer." Thus, the IRS introduced the Special Transportation Industry substantiated per diem to enhance and simplify tax compliance for fleets by relying on nights away from home instead of miles traveled.
The most beneficial aspect to a driver is that:
- Substantiated method 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.
- The average driver will save an additional $1,126 - $1,467 in income and payroll taxes over cent-per-mile.
How often does IRS revise the per diem rules?
The Internal Revenue Code gives the IRS Commissioner discretionary authority to issue regulations, such as revenue rulings and procedures, to ease the burden on taxpayers, who would otherwise have to meet the extensive substantiation requirements in order to claim deductions for business related travel. The Commissioner updates these Revenue Procedures annually, but the relevant per diem provisions have remained substantially the same since 2011.
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. While, both the substantiated and cent-per-mile per diem methods are IRS-compliant, neither method has been considered a wage reclassification for over 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.
Get in touch with the experts at Per Diem Plus today to discuss a smooth rollout for your system.
Per Diem Plus FLEETS is a configurable mobile application enterprise platform that automates administration of an IRS-compliant accountable per diem plan for truck drivers and fleets managers. No matter how big or small your company is, Per Diem Plus has a solution for you.
About Per Diem Plus FLEETS
Per Diem Plus FLEETS is a proprietary mobile software application that was designed by truckers and built by tax pros. It is the only IRS-compliant mobile enabled solution that automatically tracks each qualifying day of travel in the USA & Canada for solo and team drivers and replaces ELD backups (logbooks) to substantiate away-from-home travel.
About the Author
Mark is tax counsel for Per Diem Plus. With nearly two decades of experience advising trucking companies on per diem issues, Mark was responsible for defining the Per Diem Plus software logic rules that automatically calculates trucker per diem in accordance with IRS regulations. He also previously served as the consulting per diem tax expert for Omnitracs.
In addition to his time working with Per Diem Plus, Mark works in private practice as an Enrolled Agent at Mark Sullivan Consulting, PLLC specializing in federal tax controversy representation and consulting. He also served as the consulting and expert witness for the Federal Defenders Office and private defense counsel in financial crimes cases in multiple federal district courts. Contact Mark W. Sullivan, EA
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Disclaimer: This article is for information purposes only and cannot be cited as precedence or relied upon in a tax dispute before the IRS.
[i] The 2019 per diem rate for travel in the USA is $66 and $49.50 for a partial day.
ii] The IRS raised the deductible percentage of employee travel related expenses to 80% in 2008
iii] Federal Register-1989-12-12 Vol 54 Page 51038 pursuant to “Family Support Act of 1988”
[iv] Rev. Ruling 2006-56, 2006-2 CB 274
[i] Updated annually IRS Notice 2019-55, 2018-77, 2017-54, 2016-58, 2015-63, 2014-57, 2013-65, 2012-63, Rev. Proc. 2011-47, 2010-39, 2009-47, 2008-59, 2007-63, 2006-41, 2005-67, 2004-60, 2003-80, 2002-63 and 2001-47.