A staffing firm (aka contract house) will give a W2 hourly rate. If the assignment is out of town, what some have done is say they will break-out from your W2 hourly rate a daily Per Diem. You keep track of all your expenses and when you do your personal income taxes you can apply those expenses to the Per Diem you were paid. The Per Diem is paid without any withholding.
I know there are companies which pay a salary and the Per Diem is on top of this. This is not the case with a contract house. They may pay you a higher W2 rate, but they break-out part of it for Per Diem. So this way you are paying for your expenses pre-taxed. If you don’t spend all the Per Diem, then you end up paying income tax on it.
What can be expensed on Per Diem in this situation where the IRS doesn’t have a problem with it? The normal things that come to mind are hotels, and meals. But what if you are renting an Airbnb and go grocery shopping. Can the groceries be part of your Per Diem or is this limited to purchasing meals only?
What about travel by car. Do you track mileage in this case or the actual money spent on gas?
I don’t know what you mean by “W2 hourly rate”. I’m familiar with the IRS form W2 and I don’t recall there being any box on that form for “hourly rate”. In fact, hours are not mentioned on the form at all.
AIUI, the IRS permits an employer to give employees a per diem of any size for any reason but if it exceeds certain guidelines it has to be taxed as income. The GSA sets maximum amounts for lodging, and for M&IE (meals and incidental expenses), which vary from state to state and usually by city. For example, my company recently sent an employee to Seattle, where the published rate was $167 for lodging and $74 for M&IE. In that situation, the company could agree to pay for the hotel room plus a per diem of $100 but then $26 of that would be taxed as income. If the company paid a per diem of $74 or less, none of it is taxed. The employee can spend it on anything they want; they don’t need to keep records of how the money was spent. This is a chance for the company to be a bit generous toward the employee without having to count it as income on the employee’s pay stub, which means the employee doesn’t need to muck about with itemized deductions on their 1040. You don’t deduct it because it wasn’t taxed in the first place.
For business use of an employee’s car, the maximum is the standard mileage rate, currently 53.5 cents per mile. The company can reimburse any dollar amount they want but if it exceeds 53.5 cents per mile then the overage must be taxed as income. As a boss, I’m free to give my employee $100 to drive 4 miles round trip to Staples and buy some Post-it-notes, but $97.86 of that $100 would be taxed as income.
People who work through staffing firms (aka Contract houses) are W2 contractors. They are paid an hourly rate. You work 39 hours that week, you get paid 39 hours. You work 42 hours that week, you get paid your regular rate for 40 hours plus time and a half for 2 hours of over time. The employer provides health care insurance, but no other benefits such as PTO or 401(k) matching. They are an employee of the staffing firm assigned to work for a specific client full-time for the duration of the project.
The whole idea behind Per Diem is that you don’t keep or match any receipts against the amount. The amount given by city is up to a non-taxable limit for “lodging” and “meals”. So if you are going to Seattle, you get $167 for lodging and $74 for M&IE. That means you get $241 per day tax free, which is intended to cover the cost of where you sleep and what you eat. Then it’s on you to choose how you sleep and eat, out of your pocket. You can sleep in a park and fast all day and pocket the whole $241. Or you can stay at The Ritz and have Steak & Lobster, you get $241 and the rest of the cost is out of your pocket. When you do your taxes none of this is even mentioned.
(Caveat: If you travel to the same away from home location for more than 11 months then the tax rules say all of that non-taxable reimbursement is now considered taxable because they think you’re not really traveling anymore, you’ve relocated.)
So, to answer the question “What can be expensed on Per Diem”, it’s not really the right question, yah? It’s just money that’s not taxed. Buy a pair of shoes, go to a ballgame, liposuction, you get the idea.
As a W2 contractor, they break out from your hourly rate. For example, if you are paid $80.00 an hr, they could break out $20.00 an hour X 8 hours and say your Per Diem is $160.00 a day. So in your paycheck from the staffing firm, it will show your pay is $60 an hour plus $160 a day. You are not taxed on the $160, and you must submit with your personal tax return with the expenses, otherwise you will end up paying tax on the entire $160 a day. This is not money given to the employee by the employer for expenses, it is the employee’s own money.
Again, in this case it is not an expense report you turn into the employer. For a W2 contractor, the employer never gets the expense report, because they already paid you the money without withholding on your paycheck. It is for your personal return. So there must be things the IRS allows and disallows. I don’t think buying a pair of shoes out of town on a business trip is going to be allowed for Per Diem. That’s why I asked is there a difference in meals if you purchase the groceries and make your own meals in your temporary corporate housing vs. going to a restaurant?
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That’s why I asked is there a difference in meals if you purchase the groceries and make your own meals in your temporary corporate housing vs. going to a restaurant? I see allowances for meals and tips, which implies you will be dining out all the time, which won’t be the case if the W2 contractor is renting an airbnb for the months on assignment in that town away from their home.
I’m still a bit confused. I think you are using the word “contractor” in an unusual way here. When discussion taxes and the IRS, “contractor” usually means a person who gets a 1099 instead of a W2 and is entirely responsible for their own taxes (nothing is withheld) so they have to file a 1040 plus a 1040SE and pay self-employment tax. The alternative is “employee”, which is a person who gets a W2 and has taxes withheld, including FICA, and they just file a normal 1040.
I would not be surprised to hear someone say “1099 contractor” or “W2 employee” but hearing “W2 contractor” leaves me scratching my head.
What you’re describing sounds like an hourly employee (as opposed to a salaried employee). They get a W2 each year showing that SS tax, Medicare tax, and income tax, have been withheld from each paycheck, right? The part that I see as being unusual is that they are an employee of the staffing company being loaned out to the client company. From the client company’s point of view, the person is NOT an employee. Informally, they might call the person a “temp” or a “contractor”, but it’s more accurate to say that the client company considers the staffing company to be a contractor. The client company might send the staffing company a 1099* and the staffing company would send the temp a W2 but the client company wouldn’t send anything to the temp (except maybe a Happy New Year greeting card). Any “per diem” would be paid by the staffing company, not the client company, correct?
*1099s are not necessary if the staffing company is a corporation, but they are necessary if it’s a sole proprietorship or an LLC or a partnership, and if the total bill exceeds $600 in a year.
Agreed. Spend it however you want and pocket what you don’t spend.
Just one more wrinkle: Those published amounts are the maximum per full day when staying in another city. For partial days, traveling to and from, the employer should establish a policy about pro-rating those days. A recommended policy is 75% of the M&IE on partial days, but the IRS allows any reasonable and consistent policy. So, if traveling to Seattle on Monday, staying Monday night and Tuesday night, coming home Wednesday, you could get two nights lodging 2x167 plus $74 M&IE on Tuesday plus 75% of $74 on Monday and Wednesday: 334+74+106=$514
BTW, I can imagine a boss telling the employee “Here is $100. Keep your receipts and give me back the money you don’t spend.” but then that’s not really a per diem. It’s an expense account with money given up front.
There is large company, say IBM. They have a contractor with a staffing firm (aka contract house). They have employees from the contract house working full-time on-site at IBM. IBM refers to them as “contractors”, but they aren’t 1099 contractors, or corp to corp contractors, because they go through a contract house. They are called W2 Contractors because they are employees of the contract house, and IBM doesn’t have billing directly with them. They doing the billing through the contract house. W2 contractors are hourly employees of the contract house. I hope this clears up your misunderstanding. They refer to them as W2 contractors so they aren’t confused with people who contract directly with IBM, in this example.
With Per Diem, the Per Diem is paid to the W2 contractor without withholding. So this is so the contract house doesn’t have to be bothered with expenses paperwork, it is the W2 contractor’s responsibility to address it on their personal tax return. If the contract house breaks out from the hourly rate being paid which amounts to the Per Diem for that city, if the W2 contract employee doesn’t address this on their personal tax return they will end up paying taxes on all of it because it will be treated as ordinary income, which is what you want to avoid. You want to be paying for your expenses away from home pre-tax.
I mentioned this is for a W2 contractor, because this is not the same relationship, in say a regular salaried employee for IBM would submit expenses back to IBM to be reimbursed for out-of-pocket costs and mileage.
They are also called W2 contractors by the contract house staff, because they aren’t being paid benefits such as vacation or 401(k) matching. Contract houses do also have 1099 contract employees where they don’t do withholding on anything, and the 1099 contractor has to be responsible for all their own taxes such as making quarterly payments.
You can argue all you like you don’t like the name W2 contractor, but hopefully this makes sense to you and those who don’t know this exists. If you contact a contract house for a job, they are doing to talk to you about your W2 rate. This has nothing to do with boxes on a W2 IRS form.
Got it. They are employees of the staffing company, which contracts to the client.
I assume that the staffing company is the one paying the per diem, not the client company, correct?
I think you have it backwards. It’s the employer’s responsibility to look up the maximum rate for the city and state and make sure the per diem they pay is at or below the maximum, or withhold taxes on the overage. The employee doesn’t have to do anything on their 1040 at all. The total shown as “income” on their W2 should not include the per diem.
If you earn $48,200 wages in a year and they gave you a total of $2,351 in per diems here and there, you actually got paychecks for $48,200 minus taxes plus $2,351 but your W2 will only show $48,200 as income.
If your employer gives you a per diem that is at or below the government rate as part of an “accountable plan”, where you must substantiate expenses to your employer . it is not taxable as income and nothing needs to go on your tax return about it. There are different ways to substantiate your expenses - for example, if you go out of town, stay in a hotel and get a per diem at or below the Federal rate , the hotel bill would substantiate that you were out of town and would serve to also substantiate the per diem. IRS publication 463 explains the rules.
From what the OP described, I think his employer’s method might fit under the rules for per diem and car allowances.
If you have a non-accountable plan, all of the per diem is income and you can deduct your expenses as business expenses ( but only the amount over 2% of your adjusted gross income) if you itemize .
Wow, what a shitty contracting firm, then. Back in my day as an “agency employee” (much less confusing term), part of the $55 per hour that GM paid went to my vacation, health insurance, sick days, and 401(k) matching. There’s no benefit to working for a contract house if they’re making $125 per hour and only giving you $45.
This sounds confusing. Are you saying that the contract house is stealing pay from the employee? If the employee is paid $45 per hour, per diem is meant to be on top of that. And in any case, per diem doesn’t have to be dealt with on any one individual’s tax forms. It’s not reported on the W2, it’s not considered for FICA, and you don’t pay taxes on it (unless you are later deemed to have relocated). If you make $45 bucks per hour for six months (1040 hours), your W2 should reflect $46,800 of income. Those 183 days of per diem at $175 ($13,725) won’t be reported as income, and nothing is due, and there’s nothing to report to the IRS.
Now this hypothetical, shitty contract house that doesn’t pay vacations or have a 401(k) might be stealing from you, is that it? That is, are you saying that they promise a wage of $46,800, but are only reporting $33,075 because they claim that they’re paying you a per diem while you’re on the road? Well, that’s fine. Your W2 will only reflect $33,075, because you’re a schmuck not making $45 per hour like you were promised; you’ve been suckered into agreeing to work for $31.80 per hour.
And assuming that you’re getting a per diem in your home area, then you’re both breaking the law. Per diem is intended for business travelers, working outside of their home area.
It’s all about negotiating your contract. I’ve worked for contract house where people working side by side doing the same work were paid vastly different rates. A $20 per hour differential isn’t unheard of. I’ve never been offered per diem on local contracts, seems the contracts are very aware that they will get hammered for doing so.
People contract for different reason. One if them is to avoid paying full child support. If you are making say $80K per year but are receiving per diem of $25K then your W2 will only show $55K of income. It lowers the base number o which they calculate child support. Some people live with friends or relatives in the city they contract in and just pocket the tax free money. Some people don’t have a clue and get royally shafted in their rate, which the contract house loves.
This sounds confusing. Are you saying that the contract house is stealing pay from the employee? If the employee is paid $45 per hour, per diem is meant to be on top of that. And in any case, per diem doesn’t have to be dealt with on any one individual’s tax forms. It’s not reported on the W2, it’s not considered for FICA, and you don’t pay taxes on it (unless you are later deemed to have relocated). If you make $45 bucks per hour for six months (1040 hours), your W2 should reflect $46,800 of income. Those 183 days of per diem at $175 ($13,725) won’t be reported as income, and nothing is due, and there’s nothing to report to the IRS.
Now this hypothetical, shitty contract house that doesn’t pay vacations or have a 401(k) might be stealing from you, is that it? That is, are you saying that they promise a wage of $46,800, but are only reporting $33,075 because they claim that they’re paying you a per diem while you’re on the road? Well, that’s fine. Your W2 will only reflect $33,075, because you’re a schmuck not making $45 per hour like you were promised; you’ve been suckered into agreeing to work for $31.80 per hour.
And assuming that you’re getting a per diem in your home area, then you’re both breaking the law. Per diem is intended for business travelers, working outside of their home area.
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You are confused and are manufacturing a situation that doesn’t exist with bogus numbers. There is nothing shitty about it. I recommend you read the postings more carefully, because I don’t see it worth my time to repeat what I’ve already explained in detail.
Please, let’s not go off on a tangent because someone posted without actually reading the thread. I’m not getting low pay here, I don’t work for a shitty contract house, I am not avoiding child support, I’m not pretending to work out of town when I’m not. I’ve never met anyone who has contracted in the decades I’ve been in this business who is doing so to avoid child support, and that has nothing to do with this thread.
Thanks. This sounds reasonable. That the Per Diem that is paid as a W2 Contractor is not taxed, so it is the employee who has to have all the documentation in the case of an IRS audit. I wouldn’t want the income to simply be interested and I’d have to use the business expenses not reimbursed by the employer.
What still remains is my initial question, what can the Per Diem be spent on which the IRS would not categorize as taxable income and is it restricted to hotels, purchases meals and tips? I doubt purchasing a pair of shoes, given as an example, while out of town would be considered Per Diem and non-taxable to the IRS. But if renting an Airbnb for the few months I’m there, and mostly purchase groceries and prepare the meals, would the IRS consider this part of the Per Diem? Or only if I bought a meal like at a restaurant?
Read the link and speak to a tax preparer - but if your per diem is part of an accountable plan it doesn’t matter. You only need to worry about IRS deductions if the per diem is included in your W2 income. You do not need documentation for an IRS audit unless you are deducting business expenses , which you cannot do unless your per diem is included as income on your W2
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