Just before the government shutdown, the IRS issued new higher per diem rates for the 2014 fiscal year (FY 2014) spanning Oct. 1, 2013, through Sept. 30, 2014. (IRS Notice 2013-65) A private employer may rely on these rates to substantiate employee travel expenses without having to do a strict accounting.
Strategy: Start using the FY 2014 rates right now. You don’t have to wait until next year. Alternatively, you may stick with the 2013 rates through Dec. 31, 2013.
The IRS bumped up the per diem rate for travel to high-cost areas in FY 2014 to $251, $9 higher than FY 2013, one of the biggest increases in years. The rate for low-cost areas rose by $7 to $170.
Here’s the whole story: Every year, the General Services Administration (GSA) establishes per diem rates for government employees in the 48 states in the continental U.S. and the District of Columbia (“CONUS” rates); in areas outside the continental United States (Hawaii, Puerto Rico and U.S. possessions (“OCONUS” rates); and in foreign countries. The IRS says that private employers may use these rates as a recordkeeping shortcut to reimburse employees for business travel with no hassles.
In addition to the standard rates for specific destinations, the GSA sets rates for specified “high-cost” areas. This includes the usual suspects like New York City and Washington, D.C., but other lesser-known areas like Conway, N.J., are also on the list. Some areas are seasonal in nature (e.g., Vail, Colo., and Sedona, Ariz.).
The IRS' website has a list of the 20 states plus the District of Columbia listed as high-cost areas. All the other destinations are treated as “low-cost” areas under this simplified alternative.
One size doesn’t have to fit all
Although many employers know about the different per diems for high-cost and low-cost areas, they generally aren’t aware of the following nifty tax maneuver.
Strategy: Mix and match per diems for your employees. There’s no tax rule that says you must use the same method for all employees.
For example, to reduce paperwork, you might use the high-cost/low-cost method for employees who travel extensively on business, especially if they usually go to major cities. Other employees can use the actual expense method if they travel frequently to low-cost areas. Plus, you can require employees who don’t travel frequently to use this method.
Tip: You can’t use per diem rates that include lodging if you’re self-employed or own more than 10% of the company. In that case, you must keep all the records normally required for business travel and base deductions for business travel on your actual lodging expenses.