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IRS, Per Diem Audits and the Staffing Industry

The focused effort into the Staffing industry’s per diem arrangements should cause alarm to those with non-compliant plans, and those with maritime contracts may be emphasized.  An Employer who is unsure in the compliance of their non-taxable per diem arrangement may consider making it a priority to find out.[1]

An audit will look for evidence of Wage Re-characterization, [2] a practice of using per diem rates to negotiate wages such as offering a significantly lower comparable wage coupled with a substantially higher per diem rate. If paid hourly, it will often look more like a “strategy” to the IRS than a bona-fide non-taxable reimbursement arrangement. Hourly arrangements seem to have a very narrow and rare allowance.

Where to begin: Arrangements should not look more like compensation than reimbursement, and should not be made available to anyone not qualified to receive it.  Per Diem is not a salary alternative*, and if the employee’s perception that their per diem is part of their wage or hourly rate, then the payment is taxable. No longer will the arrangement qualify for a non-taxed per diem reimbursement.

Employers who use a residential home address to determine eligibility should know that the physical address isn’t relevant to the Tax Home for per diem purposes.

The tax home is the geographical area where the majority of wages were earned in a given year. It’s not about where the home is located, but where the majority of wages are earned.

Employers in Staffing must further consider the assignment length and define it as Temporary or Indefinite prior to the assignment start.  This is another key step in determining both per diem eligibility and continuing eligibility, because if the status changes to Indefinite during the course of the assignment, so will the eligibility for non-taxable reimbursements.

Anti Abuse Laws can apply if the IRS determines that an expense reimbursement arrangement shows a pattern of abuse.  If so, then all payments made under that arrangement will be disqualified and revert to taxable wages. 

The D.O.L. has made it clear that per diem audits are an “ongoing initiative” and a priority for the IRS.  A reimbursement arrangement found non-compliant will compromise both the company and their employees; both will owe the IRS back taxes.  That’s for the Employer who is not found guilty of intent.

The Employer found guilty of making wrongful payments to avoid overtime rates and back taxes, as well as any employee who knowingly accepted the reimbursement and wasn’t qualified for it, and any qualified employee who accepted the lodging portion without paying for lodging (for example, a place to stay rent-free) will face further consequences:

If the failure is deemed to be willful, criminal liability can result against corporations and individuals.  26 USC &7202 - The penalty can be a $10,000 fine and five years imprisonment.

[1] http://www.irs.gov/pub/irs-pdf/p463.pdf

[2] *Compilation of publications:  a) Troutman Sanders, 9/10/13 Per Diem Policies and Practical Considerations when using the Services of Contingent Workers b) Executive Forum, Orlando, February 2013 www.josephcsmtih.com, Joseph Smith Tax Consultants


By Cathey Botwright, President & CEO, Seaside Staffing, LLC

This content represents an opinion, and is in no way intended to represent the entirety of any law or guideline mentioned or perceived, or intended to offer direction or translation on behalf of the same or for an organization.  The content is an interpretation only of the small sampling of information represented. All questions, direction, or clarification should be address directly to the Department of Labor, Internal Revenue Service, or a qualified professional in the applicable areas.

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