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When a business pays an employee for hours worked on an as-needed basis, then the business has a per diem worker. Instead of paying set hourly wages or a fixed weekly salary, the business compensates the worker for each day or shift worked. From a tax standpoint, the IRS treats per diem wages much as regular wages.
Deductions for Wages Paid
The IRS considers wages paid to per diem employees as a deductible business expense, just as regular hourly wages or salaries would be. However, the IRS insists that all wages must be reasonable and must be paid for services rendered by the employee. Paying a per diem rate to an individual just for their availability, and not their labor, would be a non-deductible expense for the business.
Related Business Expenses
In addition to wages paid to the per diem employee, a business can deduct fringe benefits, such as the cost of health insurance provided to the employee, as well as vacation pay, awards and bonuses. The cost of uniforms, vehicles, equipment and office supplies provided by the business would also be legitimate deductions. On the other side, if a per diem employee provides her own business-related clothing or equipment and is not reimbursed, she can deduct that expense on her individual income tax return.
Employees vs. Contractors
A business must consider carefully whether or not its per diem workers are independent contractors or employees. The IRS provides several rules and guidelines that govern this choice, which carries Important tax implications. While wages, fees or commissions paid to contractors are still deductible, the employer does not have to withhold payroll or income taxes and is not bound by the ordinary rules for minimum wage or overtime. The money paid to an independent contractor is reported on a 1099-MISC, not a W-2, and the contractor is responsible for submitting the payment information to the IRS on his personal return.
Per Diem and Per Diem
Confusion may arise when also using the term "per diem" for the reimbursement provided to an employee for meal and lodging expenses while traveling. The IRS has standard per diem reimbursement rates calculated for each region of the country; these have nothing to do with wages paid to a per diem employee. The official language used in the IRS regulations refers to per diem reimbursement, not "per diem employees," which is an informal use of the term.
- IRS.gov: Employees' Pay
- U.S. General Services Administration. "Frequently Asked Questions, Per Diem." Accessed Nov. 25, 2019.
- U.S. General Services Administration. "Federal Travel Regulation, Section 300-3.1," Pages 22 and 71. Accessed Nov. 25, 2019.
- U.S. General Services Administration. "M&IE Breakdown." Accessed Nov. 25, 2019.
- U.S. General Services Administration. "FY 2020 Per Diem Rates for Georgia." Accessed Nov. 29, 2019.
- U.S. General Services Administration. "FY 2020 Per Diem Rates for Illinois." Accessed Nov. 29, 2019.
- U.S. General Services Administration. "Factors Influencing Lodging Rates." Accessed Nov. 25, 2019.
- U.S. General Services Administration. "FY 2020 Per Diem Rates for New York." Accessed Nov. 29, 2019.
- U.S. General Services Administration. "FY 2020 Per Diem Highlights." Accessed Nov. 25, 2019.
- Internal Revenue Service. "Notice 2019-55," Page 3. Accessed Nov. 25, 2019.
- Internal Revenue Service. "Per Diem Payments Frequently Asked Questions," Page 2. Accessed Nov. 25, 2019.
- Internal Revenue Service. "Topic No. 511 Business Travel Expenses." Accessed Nov. 25, 2019.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.