Daily rates are used when companies have employees who travel. These payments are intended to relieve the employee of certain travel expenses. In particular, meals and utilities (ground travel, laundry, room service, etc.) and accommodation.
This is beneficial for both the company and the employee, but there are certain situations where daily rates are taxable. In this article, we’ll take a close look at when an employee pays the daily rate tax.
Two types
There are two types of daily rates: food only and food and lodging. The names imply their use. One pays for meals, the other for meals and accommodation.
It is important that we indicate that the meals must be “non-entertainment” meals.
Provisions
As with many parts of the tax code, the daily rate rules are very specific. Meals and accommodation are different.
Also, different cities have different rates. These differences are typically referred to as “large cities” and “small towns,” with larger cities receiving the higher rates. This is known as the high-low method. Companies can also make payments based on the state in which you are traveling.
The daily rates must be equal to or less than the permitted federal limit (depending on the method chosen). The employee is responsible for submitting an expense report within 60 days. The expense report must include the date and location of the trip, the purpose of the trip, and the accommodation receipts (if the option “Meals Only” is selected).
You are not allowed to transfer credits. By this is meant that if you use less for your accommodation than you allocated, you cannot use the excess for food, or vice versa.
Tax consequences
As I mentioned in the introduction, daily rates can have tax consequences.
- When daily rates above the limit are taxable on the employee’s wages
- If an expense report is not submitted or the submitted expense report does not contain the required information, these daily rates will become taxable for the employee.
- When the employer allows you, the employee, to keep whatever you don’t spend.
If you’re traveling on business and receiving daily rates, just make sure you keep good records and stick to your receipts. It is better to have too much information than not enough.
Related reading:
Some Often Overlooked Business Owner Tax Deductions
Top 5 Overlooked Tax Deductions That You Should Use
Why financial literacy is important
* Please Note: Securities America and its agents do not provide tax advice. Please contact a tax advisor for specific information on your individual situation.
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