Starting October 1, 2024, the IRS will implement new special per diem rates to help businesses substantiate travel expenses without the need for employees to keep detailed records of every dollar spent. These rates can be used by employers to simplify reimbursements for business-related travel expenses, particularly for lodging, meals, and incidental expenses. However, it's crucial to note that while these rates streamline the process, they still require employees to substantiate the time, place, and business purpose of their travels. Here's what business owners, employers, and self-employed individuals need to know about the new rates, how they work, and the potential impact on their financial reporting.
What Are Per Diem Rates?
Per diem rates allow employers to reimburse employees for travel-related expenses without requiring receipts for each individual expense. Instead, employers use these flat rates, which vary depending on location, to cover categories such as lodging, meals, and incidental expenses. Employees don’t need to prove the actual amount spent, but they must still provide details about where and when the travel took place and the business purpose it served.
If the allowance paid by the employer is equal to or less than the applicable per diem rate, the expenses are deemed substantiated, and no further proof is required. If the allowance exceeds the per diem rate, the excess amount must either be treated as taxable income for the employee or be backed up by receipts to substantiate the actual costs incurred.
What’s Changing on October 1, 2024?
The IRS notice, which replaces the previous IRS Notice 2023-68, brings updated per diem rates for business travel starting on or after October 1, 2024. These new rates apply to employers using the optional high-low substantiation method as well as those in the transportation industry. There’s also a special rate for incidental expenses, which remains unchanged from previous years.
Updated Per Diem Rates:
- High-Cost Localities: The per diem rate for lodging, meals, and incidental expenses in high-cost localities increases to $319 (up from $309).
- Other Locations: For travel to locations that are not considered high-cost, the rate rises to $225 (from $214).
- Meal and Incidental Expenses (M&IE): The per diem rates for M&IE also increase, with high-cost localities rising to $86 (from $74) and other locations increasing to $74 (from $64).
These changes reflect the rising costs of travel and aim to give businesses an updated, accurate method for reimbursing employees on business trips.
High-Cost Localities Adjusted
In addition to the new per diem rates, the IRS has updated the list of high-cost localities. Some areas, like Los Angeles, CA, have been added, while others, such as Oakland, CA, have been removed. There are also updates to when certain locations qualify as high-cost. For instance, Portland, ME remains on the list, but it’s now considered a high-cost locality for a different part of the year.
This updated list helps businesses know which per diem rates to apply depending on the specific city and the time of year their employees are traveling.
Further Reading: Discover the meaning of per diem and how it affects business travel
What About Self-Employed Individuals?
Unfortunately, the optional high-low method isn’t available to self-employed individuals. However, self-employed individuals can still use standard per diem rates to calculate their deductions for meals and incidental expenses incurred during business travel. It's important to note that these rates apply only to meals and incidental expenses—not lodging. This can provide a significant deduction benefit, but like employees, self-employed individuals must also substantiate the time, place, and purpose of their travel.
For self-employed individuals, the special rate for incidental expenses remains unchanged at $5 per day. Although this is a small amount, it can help offset the minor costs of business travel, such as tips or other out-of-pocket expenses.
Key Benefits of Per Diem Rates
The primary advantage of using per diem rates is the administrative ease it offers employers. Instead of requiring employees to track every dollar they spend on the road, employers can reimburse their workers using these standardized rates. This reduces the burden of paperwork for both employers and employees, streamlining the process of accounting for travel expenses.
Per diem rates also help businesses maintain compliance with IRS guidelines. If the allowance paid does not exceed the IRS-determined per diem rate, the employer can treat the expenses as fully substantiated, which means there’s no need to tax or reclaim unspent amounts. This simplifies both payroll administration and tax reporting.
However, if the per diem allowance exceeds the IRS-approved rate, the excess must be reported as taxable wages. Alternatively, employers can require employees to provide actual receipts for the extra amount to avoid the tax implications.
What Businesses Should Do Next
With these updates on the horizon, now is the time for employers to review their travel reimbursement policies. Whether you're using the optional high-low method or the standard per diem rates, the new IRS notice provides an updated framework to ensure compliance and simplify reporting. Key steps for businesses include:
- Review Current Reimbursement Policies: Make sure your reimbursement policies align with the new IRS rates, especially if your employees frequently travel to high-cost localities.
- Update Employee Guidelines: Clearly communicate the updated per diem rates and travel substantiation requirements to employees. This helps ensure that travel expenses are appropriately documented and reimbursed.
- Monitor High-Cost Localities: Keep an eye on which locations qualify as high-cost to ensure your reimbursement rates are accurate and compliant with IRS guidelines.
- Consider Software Solutions: Using accounting software or expense management tools that integrate IRS per diem rates can help automate the reimbursement process and reduce the risk of non-compliance.
Conclusion
The IRS’s new per diem rates offer a simplified method for businesses to reimburse employees for travel expenses while staying compliant with tax regulations. By adopting these rates and understanding how they apply, employers can make travel reimbursements easier for both themselves and their employees while avoiding potential tax complications. Now is the perfect time for businesses to review and update their travel expense policies to ensure they are ready for the changes taking effect on October 1, 2024.
