Are Per Diem or Flat Sum Payments Considered Taxable Wages in California?
Nick Ferraro | March 3, 2022 | Wage and Hour
The state of California considers wages as compensation for an employee’s personal service. Companies may pay employee compensation by check, cash, or the cash value of non-cash payments. Wages are taxable by the federal government and the state of California.
However, per diems are generally not considered wages. Therefore, when handled correctly, per diems are not considered taxable wages. There are exceptions that employers should understand, including a recent court case involving per diems.
What Are Per Diems?
Per diems represent payments to employees for expenses incurred during work travel. They are fixed amounts paid per day for business-related travel expenses, such as meals, lodging, and incidentals.
The General Services Administration (GSA) sets per diem rates in the United States each year. For the fiscal year 2022, which began on October 1, 2021, the standard per diem rates are:
- $59 for meals and incidentals
- $96 for lodging
There are specific per diems for destinations with higher living costs than the national average. Employers may also use the Internal Revenue Service’s simplified high-low rates.
Are Per Diems Considered Taxable Income?
Generally, per diems are not taxable income. Per diems may be taxable income if:
- The per diem paid to employees exceeds the per diem rate for the federal fiscal year
- The employee did not file the required expense report with their employer
- The expense report filed did not include the place, date, time, amount, and business purpose for the per diem
- The employer gives the employee a flat sum payment with no requirement for an expense report
If any of the above criteria apply, the per diem may be included as taxable income on the employee’s W2 statement. Employment taxes are due from the employer and the employee.
Employers may choose to pay more than the federal per diem rate. If handled correctly, only the amount of the per diem that exceeds the federal rate would be included in the employee’s taxable income.
The key to preventing per diem from becoming taxable income is following the rules and maintaining detailed records and receipts. Expense reports should contain all required information and have receipts attached to the expense reports. In addition, employees should keep copies of the expense reports and receipts for their records.
Recent Court Ruling Regarding Per Diem Payments by One California Company
A decision by the United States Court of Appeals for the Ninth Circuit on February 8, 2021, could impact how some companies issue per diem payments to reimburse employees for business-related travel expenses. In the case of Clarke v. AMN Services, the court held that the employer had to factor the per diem payments to employees into the employee’s hourly pay rates.
Employers use an employee’s hourly pay rate to calculate overtime wages under the California Labor Code and the Fair Labor Standards Act. The rate is also used to calculate sick leave, double-time, and reporting time wages in California. For employers who have flat sum or automatic expense reimbursement policies, the ruling could significantly impact how they calculate wage rates and taxable income.
AMN paid a flat per diem rate to employees who worked over 50 miles away from their homes. However, the per diem rate would decrease if the person worked fewer hours than their scheduled shifts. Furthermore, the employees could “bank” hours worked over their regularly scheduled shift to “offset” the hours missed on other shifts.
The per diem rates paid to employees working away from home were not reported as taxable income. The company provided local workers with per diem payments based on the same policy. However, the company included per diem payments to local employees as taxable income.
The court ruled that the characteristics of the per diem policy indicated that the per diem payments were compensation for hours worked instead of expense reimbursements. Therefore, the per diem payments for traveling employees should be included as taxable income.
Employers May Need to Reevaluate Per Diem Procedures in Light of Recent Court Ruling
Employers with an automatic reimbursement payment or flat-sum payment policy for per diems need to take note. The ruling could result in their reimbursement payments being taxable income for employees.
Because that changes the regular hourly wage for an employee, the employer could have underpaid the employee for overtime wages. Furthermore, employees may argue that if the per diem payments are taxable wages, they were not adequately reimbursed for business-related travel expenses.
If you are unsure whether your employer is following the law regarding per diems and taxable wages, contact a wage and hour disputes lawyer for more information.