YOUR BUSINESS: Perplexed by forced per diem option?

By Donna Ryun, OOIDA Communications Manager | 12/22/2011

If you are an employed driver and feeling confused about which method of payment to choose when a company offers the choice of cents per mile or per diem, join the crowd.

For some drivers, it’s an easy choice; for others, it’s a perplexing question. In fact, if your company gives you the choice, consider yourself lucky because some companies aren’t so flexible. This issue has been cussed and discussed for quite some time now, but it seems more companies are pushing the per diem option.

According to Tom Crowley with OOIDA’s Business Services Department, the Association has been fielding an increased number of calls from members reporting they were now required to be compensated under what is commonly called a “forced” per diem plan. The majority of the member questions on mandatory per diem pay are whether it’s legal.

There’s no law against making a per diem pay plan part of the company’s policy, since it’s up to the company how it wants to pay its employees. If it’s part of the company’s pay plan, and you agree to it – you are stuck with it. Of course, it’s your choice whether to take the job.

It is, however, a pay plan gaining in popularity with motor carriers.

“Take Marten Transport, for instance. Before the recession, drivers had the option of the per diem. As they brought on new drivers, the company phased in the forced per diem,” said Crowley. “As all new drivers were required to be on the forced per diem option, they required already-employed drivers to switch over to the forced per diem plan.”

Crowley reports that Covenant Transport has a mandatory per diem package, as well.

Before we get into the pros and cons of a per diem pay plan, let’s back up a few steps. Just what is per diem and how does the per diem pay plan work?

First, let’s look at the per diem, the rate. 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. Starting Oct. 1, 2009, the per diem rate changed from 80 percent of $52 to 80 percent of $59 per day. It has not changed since.

The per diem rate can be a deduction for both self-employed truckers and employed, or company, drivers.

What is the “per diem pay plan”?

This plan is for employed, or company, drivers. The per diem pay plan means that if you agree with its pay option, the company will split your compensation into two parts: One part is your per mile earnings (taxable), and the other part is treated as your per diem reimbursement (nontaxable). The result will be that you end up paying fewer taxes, thereby increasing your take-home pay. This is the selling point for the carriers.

Here’s an example: Let’s say the company reduces a driver’s base mileage pay by 10 cents per mile for the per diem pay plan. The driver will pay taxes based on the reduced amount, resulting in more take-home pay. Then the company reimburses the driver 9 cents per mile as per diem, and this money qualifies as a nontaxable expense reimbursement. That leaves a penny that the company takes to make up for “administrative” costs.

Now let’s take a look at this a little further on down the road.

When your employer splits your compensation into two parts – your taxable earnings and nontaxable per diem reimbursement – your actual income base is lowered because the per diem is reimbursement and not considered income. This means that your total income is lower.

Since many benefits such as Social Security, disability claims, unemployment compensation and worker’s compensation are calculated based on taxable income, it follows that these payouts will be reduced because of your lower total income. You will receive less money at a time when you might desperately need it for a disability or worker’s compensation claim, and your retirement will be affected due to lower Social Security benefits.

Also, because your taxable income is lower, you could experience problems should you try to buy a home or obtain an equipment loan. 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.

Just about the only “pro” I can see in a per diem pay plan other than a bit more money in your paycheck each week is that a divorced parent might have to pay less child support because of a lower total income. But I’m not sure most dedicated parents would consider that to be in the best interests of their children.

Right about now, you are probably wondering why the company says the per diem pay plan is so beneficial. Well, it does have its benefits – to the company, that is. It gets out of paying the employer’s contribution toward Medicare, Social Security and unemployment, not to mention the reduced driver pay.

You’ll need to decide for yourself whether the instant gratification of taking home a few extra dollars in your paycheck is really worth the trade-off.

Keep in mind that if you choose to forgo the per diem payment plan 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.

While you’re considering this, you should be aware that if the driver per diem reimbursement exceeds the IRS allowance, you’ll have to repay the difference in taxes. In addition, there have been cases where the IRS ruled some company per diem payment arrangements are in violation of the law. The company is then charged with paying the penalties, and is required to issue corrected W-2 forms to any employees who were involved.

If you are one of those employees, you’ll need to amend your own taxes, which will probably result in a substantial penalty and interest charges for you.

With your financial future at stake, it’s always in your best interests to take a hard look at the entire picture before you make a decision about payment options.

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