The accurate processing of per diem (per day) payments is an important issue all staffing agencies need to fully understand.
Per diem is reimbursement for living expenses incurred for traveling away from home to work on a temporary job that will last no longer than one year. Per diem is a convenience that allows the contractor to be reimbursed without saving receipts.
A recent federal court decision suggests that failure to comply with per diem regulations can have a negative impact on the staffing agency. This ruling found that staffing firms who provide temporary, skilled labor—under an agreement that includes per diem payments to non-local employees—might be liable for employment taxes on those per diem payments.
In this case, a staffing firm provided temporary skilled workers, such as welders, machinists, and supervisors to industrial and commercial businesses. In addition to hourly wages, the staffing firm paid employees living more than 100 miles from the client’s worksite an amount designated as a reimbursement for lodging, meals and incidental expenses. After an audit, the government determined the staffing firm was required to pay employment taxes on the per diem payments. The staffing firm paid the amount for one of the employees and filed a refund claim, followed by a refund suit. The government then counterclaimed.
The court held that the per diem payments paid by the staffing firm to non-local employees were wages for purposes of employment taxes. Using the withholding statutes and treasury regulations, the court concluded that the per diem payments did constitute wages for employment tax purposes based on three factors:
- The per diem rate varied from employee to employee.
- The per diem payments were used as a substitute for compensation for services.
- The per diem payments were not separately noted on the payments to employees as required.
To pay an employee per diem, an agency must follow certain rules and regulations. At the outset, the agency must have an accountable plan, which must have a business connection where ordinary expenses incurred are allowable by the Internal Revenue Code, and must be in connection with the performance of services as an employee of the employer.
The employee must also submit information to enable the employer to identify that it is an employee business expense. For example, if lodging will not be an expense related to employment, then only meals and incidental expenses may be on the per diem. To avoid unnecessary complication, employees and employers may use certain types of established per diem rates. In addition, the arrangement should require the employee to return any amount paid in excess of the substantiated expenses.
Agencies also may not pay per diem on an hourly basis, but may pay it weekly. It must be a separate entry and not calculated into the standard pay-by-hours calculation. Finally, per diem should not be paid to employees who work in the immediate area where the work is performed. IBI