After months of virtual meetings, your business’s employees may be finally resuming travel. If so, your employees can use the IRS’s “per diem” rates to substantiate the amount of expenses for lodging, meals, and incidental expenses while traveling away from home (or use a special transportation industry rate if your company works in the transportation industry).
The IRS has announced the “per diem'' rates for the 2022 fiscal year in Notice 2021-52. These rates became effective October 1, 2021.
The high-low per diem method
For employees of a business, the high-low per diem method is a simpler alternative to tracking actual travel expenses. The high-low per diem method provides fixed travel per diems based on the IRS’s per diem rates which vary depending on locality.
Under this method, certain areas with higher costs of living fall under an annual “high-cost” flat rate, and all other locations within the continental United States are automatically considered “low-cost.” High-cost areas include locations such as San Francisco, Seattle, and Boston. Taxpayers may choose to use the high-low method instead of applying the specific per diem rates for individual business destinations.
Under certain circumstances, such as an employer paying the hotel directly or providing lodging, employees may receive a per diem reimbursement that only covers meals and incidental expenses. If an employee is traveling but doesn’t pay or incur meal expenses for a full (or partial) calendar day, there’s also a $5 incidental-expenses-only rate.
Per diem rates and record keeping
Employees don’t need to follow the IRS’s usual recordkeeping rules if your company uses per diem rates.
Under the per diem method, receipts of expenses generally aren’t required, and reimbursements aren’t typically reported on an employee’s Form W-2 or subject to income or payroll tax withholding. However, employees will still need to substantiate the place, time, and business purpose of their travel.
The new per diem rates for fiscal year 2022
The new per diem rate for travel after September 30, 2021 is $296 for all high-cost areas within the continental U.S.—this amount includes $222 for lodging and $74 for meals and incidental expenses. The per diem rate for travel after September 30, 2021 is $202 for all other areas within the continental U.S., consisting of $138 for lodging and $64 for meals and incidental expenses. Per diem rates for both high- and low-cost areas increased $4 compared to fiscal year 2021.
It’s important to note that various rules and restrictions apply to the use of this method. For instance, if a company uses the high-low method for an employee, they must then continue to use that method for all reimbursement of business travel expenses within the continental U.S. for the rest of that calendar year (that employee may be reimbursed for travel outside the continental U.S. through any permissible method, however).
When reimbursing a particular employee’s travel, employers must continue to use the same method (high-low or per diem) that they used during the first nine months of a calendar year during the last three months of the calendar year. It’s also worth noting that individuals who own 10% or more of the business can’t be paid per diem rates.
Switching to the high-low method can potentially help your company reduce the time and frustration of traditional travel reimbursement. If you’re considering using the high-low method for travelling employees or have other questions about travel reimbursements, contact us.