Revenue Ruling 2006-56 tells employers that if they routinely pay per diem allowances in excess of the federal per diem rates, but do not track the allowances and do not require the employees either to actually substantiate all the expenses or pay back the excess amounts, and do not include the excess amounts in the employee’s income and wages, then the entire amount of the expense allowances is subject to income tax and employment tax.
The IRS notes that generally, amounts employers pay employees to reimburse them for substantiated business expenses are not subject to income tax or employment tax. For reimbursements for expenses for meals and other incidentals associated with business travel, employees get this exclusion for reimbursements for each day of travel up to the federal per diem rates without having to actually substantiate the amounts of the expenses.
However, if an employer pays expense allowances that exceed the federal per diem rates, the excess amounts are subject to income tax and employment tax if they are not repaid to the employer, unless the employee actually substantiates all of the expenses covered by the per diem allowance.
While the revenue ruling uses a scenario in the trucking industry because of the industry’s widespread use of per diem allowances, the IRS notes that the analysis in the revenue ruling applies to any employer in any industry that uses per diem allowances to reimburse employee expenses.
Revenue Ruling 2006-56 is online at http://www.irs.gov/pub/irs-drop/rr-06-56.pdf