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Rick, I'd like to offer a straight answer, but from my (business owner) perspective there are a lot of issues associated with this including the types of employees involved, the amount of the allowance, the kind of reimbursement plan, the connection between the expenses and the work performed, and the substantiation method used. I know how we do it and why, but that may not be right for your situation.
I realize that's not very helpful, but if nothing else, maybe it confirms that feeling "kinda lost" on this is totally understandable! Perhaps there are a couple of qualifying questions that a CPA (or someone else with in-depth knowledge about the related Treasury rulings and regulations) can post here that would simplify the main issues and lead to a more definitive response. Best wishes.
You should record the per diem collected from your clients as income and record the payments to employees/contractors as an expense.
Keep in mind that the IRS emphasizes the need for employers to track the amount of expense reimbursement allowances paid to employees on a per diem basis. Generally, amounts employers pay employees to reimburse them for substantial business expenses are not subject to income tax or employment tax. For reimbursements for expenses for meals and other incidentals associated with business travel, employees get this exclusion for reimbursements for each day of travel up to the federal per diem rates without having to actually substantiate the amounts of the expenses. However, if an employer pays expense allowances that exceed the federal per diem rates, the excess amounts are subject to income tax and employment tax if they are not repaid to the employer, unless the employee actually substantiates all of the expenses covered by the per diem allowance.
I would recommend visiting the IRS website to find out the per diem rate for your state to ensure you are in compliance.
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We normally charge clients a nominal "per diem" to cover meals & incidentals when our people are traveling more than 50 miles from their home. What is the best method of accounting for the per diem charge and the per diem expense paid to employees and contractors? Do we record the per diem that is collected as income and record the payment to employees & contractors as the expense, record both as "meals & entertainment" and hope it works out, or some other method? Kinda lost here & appreciate your help.