High-low method of determining per diem rates to end

Businesses that reimburse employees for away-from-home travel costs using a per-diem amount, rather than the actual costs, should take heed of a new announcement from the IRS. The IRS has announced that it plans to discontinue one of the permissible per-diem methods.

An employer may pay a per-diem amount to an employee on business travel status instead of reimbursing actual substantiated expenses for away-from-home lodging, meals and incidental expenses, provided certain conditions are met:

  • The per-diem rate cannot exceed IRS-approved maximums; and
  • The employee must provide simplified substantiation as to the time, place and business purpose of the travel.
  • These per-diem payments are treated as reimbursements made under an accountable plan. The payments are not subject to income or payroll taxes and they are not reported on the employee's Form W-2. Receipts for actual expenses are not required.

In general, the IRS-approved per-diem maximum is the General Services Administration (GSA) per-diem rate paid by the federal government to its workers on travel status. This rate varies from locality to locality.

For many years, instead of using actual GSA per-diems, employers have been able to use a simplified "high-low" per-diem method. Under the high-low method, there is one per-diem rate for all "high-cost" areas within the continental U.S. and another per-diem rate for all other areas.

Since Oct. 1, 2010, the high-cost-area per diem has been $233, consisting of $168 for lodging and $65 for meals and incidentals. The per-diem for all other localities has been $160, consisting of $108 for lodging and $52 for meals and incidentals. These rates were set in Revenue Procedure 2010-39.

In Announcement 2011-42, the IRS has stated that it intends to do away with the "high-low" method of substantiating away-from-home travel expenses. Since there is no indication of when the high-low method will be discontinued, employers currently using it may continue to do so until advised otherwise by the IRS. Also, businesses may still use a per-diem reimbursement method, provided they use the GSA rate for each particular destination.

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