OOIDA Information Service
Per diem is a Latin phrase meaning “per day.” Most truck drivers refer to it as the standard daily meal allowance the IRS allows them to deduct on their taxes. For taxable years beginning in 2004 and 2005, the per diem rate is 70 percent of $41. The percentage will increase to 75 percent in 2006 and 2007, and will be 80 percent beginning in 2008.
Lately, we’ve been hearing from company drivers who are asking questions about a per diem payment option that an increased number of companies are offering. It’s pitched to new recruits as a “tax break” option in which drivers can save a lot of money in taxes and take home a bigger check. Sounds like a deal, doesn’t it? Well maybe — but for whom?
Question: In orientation, the company talked about two different payment options ... one was a per diem or tax-break option and the other was straight mileage pay. With the per diem option, the mileage pay was a few cents less than the straight mileage pay option, however, they explained that a portion of my mileage pay would be treated as a per diem reimbursement, and I wouldn’t have to pay taxes on that amount. In other words, I’d take home a bigger check in the long run because fewer taxes would be taken out of it. I’m tempted to go this route, but it sounds too good to be true. What’s the catch?
Answer: First, let me explain that I’m definitely not a tax expert. I leave that complicated mess up to those who are trained number crunchers, and I would recommend that policy to others as well.
If you have reservations about the payment options any company offers, you should talk it over with a qualified professional before you make your final decision.
Having said that, there’s still some justification for a curious non-tax expert like me to see a few red flags pop up concerning the per diem payment option.
The way I understand it, the company’s per diem option means that if you agree to accept a few cents less per mile than the straight mileage pay option offer, they will split your compensation into two parts: one part being your per mile earnings (taxable), and the other part being treated as your per diem reimbursement (non-taxable). The result will be that you will end up paying fewer taxes and contributing a lesser amount toward Social Security, thereby increasing your take-home pay.
On the surface, this may sound like a good deal for you. Everyone can use more take-home pay; however, when you take a look at the big picture, you may need to reconsider. Here’s why:
When your employer splits your compensation in such a way, your actual income base is lowered because the per diem is reimbursement and not considered income. This means that if you are hurt and/or disabled, your disability benefits will be less because they are based on your lower income.
If you become unemployed, your unemployment benefits will be lower for the same reason. This also applies to any future Social Security benefits that you hope to draw upon retirement. Are you planning to buy a home or obtain a truck loan in the future? Your income may hinder your ability to get the money you want or need because your borrowing power is based on your earned income and not your per diem reimbursement.
Let’s take a minute now to consider what’s in it for the company.
The per diem payment option pays drivers a few cents per mile less than the straight mileage option. While not all companies reduce the mileage rate and replace it with per diem pay, many choose to do so. That’s potentially a hefty savings for the company considering the number of drivers who may choose the per diem option thinking they are getting a tax break. In addition, by treating part of your income as per diem reimbursement, the company gets out of paying the employer’s contribution towards FICA-Medicare, unemployment, etc., on the portion identified as per diem.
So just adding this all up, it looks like the company increases its profits by paying you fewer cents per mile and the government fewer taxes, while you get lower unemployment, disability and Social Security benefits, as well as reduced chances of getting a home or truck loan.
However, you do have the instant gratification of taking home a few extra dollars in your paycheck. You’ll need to decide for yourself whether that’s worth it.
While you’re considering this, you should also be aware that there have been cases in which the IRS ruled some per diem payment arrangements are in violation of the law and forced the guilty companies to not only pay penalties, but also issue corrected W-2 forms to any employees who were involved.
If you happen to be one of these employees, you’ll need to amend your own taxes, which will probably result in some substantial penalty and interest charges for you to pay as well.
If you choose to forego the per diem payment arrangement and opt for the straight mileage rate, you can still deduct your standard meal allowance expenses when you file your income taxes. Your tax professional can show you how to take this deduction.
As I said before, I’m no tax expert; however, it’s my opinion that when the company pays its drivers based on a per diem arrangement, it’s the trucker who gets the short straw in the long run. You should check with a qualified tax professional to see whether he or she agrees.
If you have questions about doing business as an owner-operator and/or an independent driver, please e-mail them to firstname.lastname@example.org or send them to her at PO Box 1000, Grain Valley, MO 64029. We can’t publish all of your questions in Land Line, but you will receive a response, even if your letter is not published.