The Internal Revenue
Service has issued guidance emphasizing that employers must track the amount of
expense reimbursement allowances paid to employees on a per diem basis. The IRS
explains that, generally, amounts paid to employees as reimbursement for
substantiated business expenses aren’t subject to income or employment taxes.
Further, per diem payments for meals and lodging that don’t exceed the federal
per diem rates are considered to be substantiated without accounting for actual
expenses.
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However, the IRS says,
the entire amount of expense allowances in excess of the federal per diem rates
will become subject to income and employment taxes unless employers track the
allowances, require employees to substantiate the expenses or pay back any
excess amounts, and include any excess in the employee’s income and wages.
To read the IRS Guidance
(Revenue Ruling 2006-56), go to www.irs.gov/pub/irs-drop/rr-06-56.pdf.