Q22: What about per diem PD?

ROB DAVIS, P.E.


Q22: What about per diem?

The short answer is, it is in your best interest to pay me per diem (PD). Because the higher the amount of the PD, the more profit you will make!

The long answer is...

Will it cost you anything? No, there is no additional cost. The PD does not come out of your money. It comes out of my money!

What is PD? Do you know what PD is? Keep reading! PD is a reimbursement for temporary living expenses I incur while I'm working more than 50 miles away from my permanent home. It is a lump sum payment in lieu of expensing you for each separate expense I incur.

What is your benefit? With PD, you can make more profit, make more money, attract out of town talent, and save more money, too! Why? Because on PD payments you don't have to pay the usual 7.65% FICA, unemployment insurance and Medicare. As the example near the end of this page proves, PD payments can increase your company's profits by 63.8 per cent!!

How do you increase your profits? The more money you allocate to the payment of PD, the more money you're going to make! Did you know that on PD payments you don't have to pay the usual 7.65% FICA, unemployment insurance and Medicare?

Not a favor! Some recruiters, not realizing this is their chance to make more money, make me think they're doing me a favor when they're agreeing to pay me PD, out of my own money!

Fear. Some recruiters use fear to try to make me think fear is holding them back, before they agree to pay me PD, out of my own money. Think about it! There is nothing to be feared! Read the rule book! You're not breaking any rules! View and read IRS Publication 463.

Does this PD go on my W-2? No, it doesn't! Read the rules! They're in the lower right corner of page 8 of IRS Publication 463. It says, "Reimbursements treated as paid under an accountable plan, as explained next, are not reported as pay."

Do you report this PD on my W-2? The answer is "no, you don't". See "reimbursements" in chapter 6 of IRS Publication 463.

What are the PD rates? PD rates are given in standard tables by the IRS and the GSA. Which one do you use? IRS Publication 1542 is excellent for filing your tax return (for last year), however the standard tables at the General Service Administration's web site are more relevant, therefore more useful to you, when you're working on the details a new contract.

The high-low rate. Can the PD exceed this rate? Yes, it can. If this statement sounds like a contradiction, please remind yourself the IRS Code is full of contradictions. Read the rules. Read IRS Publication 463. Scroll down to page 30, find the "High-low rate" subsection, and read it. It says the 2010 "high rate" (for New York City, San Jose, etc.) is $258 per day, and for any other location in the Continental United States the "low rate" is $163 per day.

Higher rates are possible. Can you get an even higher rate? Yes, you can. The key is my location, not the location of your end client. This means, if your end client's plant is in a suburb, but my hotel is in a nearby big city, often a higher PD rate applies. Click IRS Publication 463. Read the lower right corner of page 29. It says, "For per diem amounts, use the rate in effect for the area where you... sleep or rest".

For example, if the client's plant is located in Coon Rapids MN, and if I am staying in Coon Rapids MN, then based on 2008 PD rates, I'm entitled to a PD of $119 per day. Hold it! Why don't you use the IRS' "high-low rate"? If you do, then I'm entitled to a PD of $148 per day! Wait a minute! How about an even higher rate? How about staying in the nearest big city? Based on 2008 PD rates, if my motel is in Minneapolis - just 5 miles from Coon Rapids MN - then I'm entitled to a PD of $185 per day!

Hourly payments. Are hourly payments legitimate? This is a controversial subject, and opinions differ. My guide is the law and the IRS, and they say hourly payments are not legitimate. To be considered legitimate by the IRS, the payments must be paid for every day when I'm physically staying in a location more than 50 miles from my permanent home, and the days must include all (non-working) standby days (i.e. weekends, holidays, etc).

You may calculate an hourly rate for the PD, based on your need for a reasonable profit, but you must pay me a set rate for every day when I'm in that remote city. Why? One explanation is that "per diem" means "per day", not "per hour". My experience is that, if a recruiter is telling me the PD must be paid hourly, then he or she is uninformed. Well-informed contract staffing firms pay the PD for every day.

Can the PD fluctuate, based upon my work hours? No, it cannot.

Can you not pay PD on holidays and standby days? No, the rule book says, as long as I don't return to my permanent home, and as long as the contract is in effect, the PD must be paid for every day, including standby days — i.e. for every holiday, Saturday and Sunday!

Can it depend on the type of hotel I stay at? No, the PD rate has nothing to do with whether I stay at a hotel or get a good deal on a short-term apartment.

No need for record keeping. Do I need to give you some kind of receipts for food and housing? No! The rule book says, the only proof I need is the proof of payment of PD. Why? Because the intention of PD is to promote business and minimize accounting costs associated with business-related travel expenses. Read the third column on page 25, and the second column on page 30 in IRS Publication 463.

I prefer maximum PD rates, and this should be no issue. Think about it for a second! There is nothing to be feared! You're not breaking any rules! If you have too many fears, you shouldn't be representing me!

What do the best contract staffing firms do? They calculate and pay me maximum PD rates. They're aware of the fact that I'm entitled to the full amount of the PD rate, as long as I keep working, and don't return to my permanent home.

Who sets PD rates and PD rules? Rates and rules are set by Federal law and interpreted by IRS. Do you need more information? Would you like to see the PD rates for your city or county? The General Service Administration's web site is a reliable info source of current PD rates.

What is the most useful rule book on PD? It is IRS Publication 463. Other rule books on PD are IRS Publications 511, 1509, and 1728.

Do you allocate PD for weekends and standby days? The answer is, "Yes, you do." See IRS Publication 463 and IRS Publication 1728.

What are the maximum PD rates? See the General Service Administration's web site.

IRS Publication 463 is an important source of information on the subject of PD payments, weekends, standby days, reimbursements, record keeping, reporting, maximum PD rates, high-low rates, proof of expenses and the IRS' four conditions that qualify me to receive PD.

What do you say in your contract? Splits are not my preferred way of doing business, but sometimes they can be done without too much harm being done. However, FYI, if you pay my PD on an hourly basis — that is, if you tie the amount of the PD to the number of hours I work — it is fraught with problems because there will be many potential opportunities for misunderstandings. For example, "Is my check going to be short, if one of the weekdays is a holiday?"

A solution. One contract-staffing firm prevents potential problems associated with holidays, weekends and other standby days. How do they do it? In their contracts they spell out in advance the formula they use. For example, if they want to split $29 per hour out of my rate of $60 per hour, they use the following wording in their contracts: "PD is divided as follows: 27 hours or less: PD rate per hour. 28 to 32 hours: PD rate for 32 hours. 33-35 hours: PD rate for 35 hours. 36 to 40 hours: PD rate for 40 hours. Overtime hours: $90 per hour rate and no additional PD."

Note: In this example the "PD rate" is $166 per day, which is ($166 * 7 days) / 40 hours = approx. $29 per hour.

NUMBER OF HOURS WORKED PER WEEK HOW MUCH PD DO YOU PAY?
27 hours or less PD rate per hour
28 to 32 hours PD rate for 32 hours
33 to 35 hours PD rate for 35 hours
36 to 40 hours PD rate for 40 hours
Overtime hours $90 per hour rate
and no additional PD

Is there any additional cost to your firm? No, there is no additional cost. The PD doesn't come out of your company's money. It always comes out of my money!

How much money would you like to make? The more money your company allocates to the payment of PD, the more money your firm is going to make! Did you know that on PD payments your firm doesn't have to pay the usual 7.65% FICA, unemployment insurance, or Medicare?

Example: Let us say the contract is in the Boston area, your billing rate is $100 per hour, my rate is $80 per hour, your overhead is $8.88 per hour, I work on a W-2, the maximum PD is $238 per day, and you have the option of splitting or not splitting the PD (of $238 per day x 7 days / 40 hours = $41.65 per hour) out of my own money.

A) If you don't do the PD split, then, on my rate, you will make only ($100 per hour - 80 per hour - $8.88 per hour - 6.12 per hour FICA =) $5.00 per hour.

B) Alternatively, if you do split this ($41.65 per hour) PD out of my money, then you will be able to make ($100 per hour - 80 per hour - $8.88 per hour - 6.12 per hour FICA + 3.19 per hour FICA =) $8.19 per hour on my rate. The key is the ($41.65 x 7.65% =) $3.19 per hour FICA that you will save on the $41.65 per hour. In other words, if you split PD out of my own money, you will be able to increase your profits by a whopping (($8.19 per hour - 5.00 per hour)/ 5.00 per hour =) 63.8 percent!

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