Page 17 - IRS Employer Tax Guide

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2. They must substantiate these expenses to you within The government per diem rates for meals and lodging
a reasonable period of time. in the continental United States can be found by visiting
3. They must return any amounts in excess of substanti- the U.S. General Services Administration website at
GSA.gov/PerDiemRates. Other than the amount of these
ated expenses within a reasonable period of time. expenses, your employees' business expenses must be
Amounts paid under an accountable plan aren't wages substantiated (for example, the business purpose of the
and aren't subject to income, social security, Medicare, travel or the number of business miles driven). For infor-
and FUTA taxes. mation on substantiation methods, see Pub. 463.
If the expenses covered by this arrangement aren't If the per diem or allowance paid exceeds the amounts
substantiated (or amounts in excess of substantiated ex- substantiated, you must report the excess amount as wa-
penses aren't returned within a reasonable period of time), ges. This excess amount is subject to income tax with-
the amount paid under the arrangement in excess of the holding and payment of social security, Medicare, and
substantiated expenses is treated as paid under a nonac- FUTA taxes. Show the amount equal to the substantiated
countable plan. This amount is subject to income, social amount (that is, the nontaxable portion) in box 12 of Form
security, Medicare, and FUTA taxes for the first payroll pe- W-2 using code “L.”
riod following the end of the reasonable period of time.
A reasonable period of time depends on the facts and Wages not paid in money. If in the course of your trade
circumstances. Generally, it is considered reasonable if or business you pay your employees in a medium that is
your employees receive their advance within 30 days of neither cash nor a readily negotiable instrument, such as
the time they pay or incur the expenses, adequately ac- a check, you’re said to pay them “in kind.” Payments in
count for the expenses within 60 days after the expenses kind may be in the form of goods, lodging, food, clothing,
were paid or incurred, and return any amounts in excess or services. Generally, the fair market value of such pay-
of expenses within 120 days after the expenses were paid ments at the time they’re provided is subject to federal in-
or incurred. Alternatively, it is considered reasonable if come tax withholding and social security, Medicare, and
you give your employees a periodic statement (at least FUTA taxes.
quarterly) that asks them to either return or adequately ac- However, noncash payments for household work, agri-
count for outstanding amounts and they do so within 120 cultural labor, and service not in the employer's trade or
days. business are exempt from social security, Medicare, and
FUTA taxes. Withhold income tax on these payments only
Nonaccountable plan. Payments to your employee if you and the employee agree to do so. Nonetheless,
for travel and other necessary expenses of your business noncash payments for agricultural labor, such as com-
under a nonaccountable plan are wages and are treated modity wages, are treated as cash payments subject to
as supplemental wages and subject to income, social se- employment taxes if the substance of the transaction is a
curity, Medicare, and FUTA taxes. Your payments are cash payment.
treated as paid under a nonaccountable plan if:
• Your employee isn't required to or doesn't substanti- Meals and lodging. The value of meals isn't taxable in-
ate timely those expenses to you with receipts or other come and isn't subject to federal income tax withholding
documentation, and social security, Medicare, and FUTA taxes if the
meals are furnished for the employer's convenience and
• You advance an amount to your employee for busi- on the employer's premises. The value of lodging isn't
ness expenses and your employee isn't required to or subject to federal income tax withholding and social se-
doesn't return timely any amount he or she doesn't curity, Medicare, and FUTA taxes if the lodging is fur-
use for business expenses, nished for the employer's convenience, on the employer's
• You advance or pay an amount to your employee re- premises, and as a condition of employment.
gardless of whether you reasonably expect the em- “For the convenience of the employer” means you have
ployee to have business expenses related to your a substantial business reason for providing the meals and
business, or lodging other than to provide additional compensation to
• You pay an amount as a reimbursement you would the employee. For example, meals you provide at the
place of work so that an employee is available for emer-
have otherwise paid as wages. gencies during his or her lunch period are generally con-
See section 7 for more information on supplemental sidered to be for your convenience. You must be able to
wages. show these emergency calls have occurred or can rea-

Per diem or other fixed allowance. You may reim- sonably be expected to occur, and that the calls have re-
sulted, or will result, in you calling on your employees to
burse your employees by travel days, miles, or some perform their jobs during their meal period.
other fixed allowance under the applicable revenue proce- Whether meals or lodging are provided for the conven-
dure. In these cases, your employee is considered to have ience of the employer depends on all of the facts and cir-
accounted to you if your reimbursement doesn't exceed cumstances. A written statement that the meals or lodging
rates established by the federal government. The stand- are for your convenience isn't sufficient.
ard mileage rate for auto expenses is provided in Pub.
15-B. 50% test. If over 50% of the employees who are pro-
vided meals on an employer's business premises receive

Page 16 Publication 15 (2020)