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by Paula N. Singer, Esq.
Employers are allowed to exclude from income an employee’s business-related travel expenses as a working condition fringe benefit under Section 132 when the amounts are paid or reimbursed under an accountable plan. To be excluded from income, the business-related travel expense amounts must be substantiated by receipts for actual expenses or direct payments to vendors. The IRS provides alternative substantiation rules in Revenue Procedure 2009-47 [Oct. 19, 2009] (updated annually) under which business-related travel expenses may be deemed substantiated by a per diem allowance in lieu of actual expenses.
The IRS revenue procedure defines a per diem allowance as a payment under a reimbursement or other expense allowance arrangement that is:
- Paid with respect to ordinary and necessary business expenses incurred, or reasonably anticipated to be incurred,
- Reasonably calculated not to exceed the amount of the expenses or the anticipated expenses, and
- Paid at or below the applicable federal per diem rate.
Amounts that exceed the allowable per diem amount for the location are treated either as wages or self-employment income for tax purposes (depending on the relationship of the worker to the organization), unless the worker otherwise substantiates all of the expenses covered by the per diem allowance.
Two Substantiation Methods
Employers may use either of two substantiation methods: 1) the standard federal rate method or 2) the high-low rate method.
Under the standard federal rate method, an employer may pay its employees a rate for lodging, meals, and incidentals, or for meals and incidental expenses only (M&IE), while they are traveling away from home to a particular location. The rate, which varies by location and time of year, is the highest rate that the federal government pays to its employees.
The high-low rate method eliminates the need to keep a current list of per diem rates for each location. Locations indicated as high-cost by the IRS are eligible for the high-cost rate - $258 ($65 M&IE) per diem, effective October 1, 2009. For travel on or after October 1, 2009, the per diem for all other localities is $163 ($52 M&IE).
The M&IE rate must be prorated for partial days of travel under both methods.
Standard federal rates generally become effective on October 1st as do the high-low rates. For the last three months of the calendar year, the IRS allows employers to change to the new rates or to finish out the year with the rates that they were using. Table 11-1 of IRS Publication 535, Business Expenses, describes when per diem allowances must be reported depending on how they compare to the federal rates.
Independent Contractors
Although the regulations under Section 132 extend the accountable plan rule to independent contractors providing services to the employer, the deemed substantiation rule for per diems paid to independent contractors is different than the rule for employees. Independent contractors may not use the per diem amounts that include lodging as well as meal and incidental expenses. For independent contractors, lodging expenses must be substantiated under the regular accountable plan rules in order to be excludable.
The IRS revenue procedure provides an optional method for employees and independent contractors who are not reimbursed when computing the amounts for business meals and incidental expenses (M&IE), or for incidental expenses only if no meal expenses are paid or incurred, while traveling away from home.
Sources of Per Diem Rates
Allowable per diem amounts are available on the Internet on the website of the General Services Administration (GSA) at www.gsa.gov. Click on “Per Diem Rates” for links to per diem rates for:
- Travel within the continental United States (CONUS)
- Travel within areas outside the continental United States (OCONUS) such as Alaska, Hawaii, Puerto Rico, and U.S. possessions
- Travel within foreign locations
IRS Publication 1542, Per Diem Rates, which provides CONUS per diem rates, explains the two substantiation methods for per diem rates. During the year, as changes to the federal per diem rates (updates) are announced by the GSA, the IRS incorporates the changes into Publication 1542. A “What’s Hot” article on the IRS website at www.irs.gov/formspubs under Changes to Our Current Tax Products alerts readers to locations with updated rates.
See also the discussion of per diem allowances in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Paula Singer, Esq., Co-founder and Chairman of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer LLP, Newton, MA, has over 25 years of experience providing advice and compliance services to individuals and their employers, and payers on cross-border matters.
Watch for Volume 7, Number 2, for a discussion on NRA Withholding.
Q: Under what circumstances can an organization exclude the lodging expenses of an independent contractor from reportable income?
A: The organization would need to either reimburse the contractor directly based on actual receipts under an accountable plan or pay the lodging bill directly to the lodging facility. Otherwise, any funds intended to cover lodging that are paid to or on behalf of the contractor must be treated as compensation for services.
Register Today for Windstar's April Nonresident Alien Tax Training
Hundreds of individuals have received comprehensive education on nonresident alien taxation, immigration practices, and the International Tax Navigator®. Come to Windstar’s Spring NRA Tax Training, April 27th – 30th, and join this group of educated colleagues.
Attend two days of sessions to learn about NRA taxation, two days of sessions to brush up on your Tax Navigator skills, or join us for all four days. This training has dedicated tracks featuring substantive tax and immigration based class sessions followed by hands-on Tax Navigator training.
The April 27th – 28th tax and immigration sessions will feature comprehensive information on nonresident alien taxation and include dedicated ECI and FDAP tracks on April 28th focusing on:
- Effectively Connected Income (ECI) - payments to foreign employees, students, and scholars
- Fixed or Determinable, Annual or Periodic Income (FDAP) - payments to non-employees and foreign entities
The April 29th – 30th software based training will feature a Tax Navigator basics track for new and current users looking for in depth instruction on the system and a special topics track for more advanced users.
Special topics include:
- Tax Navigator reporting functionality
- Maintaining your software
- Foreign National Information System (FNIS)
In addition, there will be an open forum session on April 29th allowing attendees to interact with one another and discuss best practices and overcoming processing barriers.
The Doubletree Guest Suites Boston will host the April training. The Doubletree Guest Suites is an all-suite hotel located on the banks of the Charles River, just minutes from downtown Boston and its major attractions. Hotel features include:
- Shuttle service to major tourist destinations in Boston and Cambridge and nearby train stations
- Low cost transportation to and from Logan International Airport
- High-def flat screen televisions in each room
- Scullers Jazz Club
Click here to view a detailed schedule outline and register.
File Your 1042-S’ Forms Confidently with Windstar Publishing’s A Guide for Filing IRS Forms 1042 and 1042-S
Award-winning author Paula N. Singer and Windstar’s Gary Singer have completely revised Windstar Publishing Inc.’s industry leading tax guidebook A Guide for Filing IRS Forms 1042 and 1042-S.
Revised in 2010, A Guide for Filing IRS Forms 1042 and 1042-S provides the most comprehensive information available for submitting Form 1042-S information returns and the 1042 tax return in tax year 2009.
The guide describes:
- When to submit Forms 1042-S information returns to recipients and the IRS
- How to request extensions of time to file the Form 1042 tax return and Forms 1042-S
- What penalties may be incurred for failure to file or for filing late
- How to submit records electronically using the IRS FIRE System
- What errors may cause the IRS to reject a submission
Included in the guide are all relevant IRS forms and instructions and IRS Publication 3609 “Filing Information Returns Electronically.”
Order your copy today by visiting shopping.windstar.com and file your 1042-S forms with confidence!
Coming Soon - Cross-Winds: What You Need to Know About Honorarium Payments and Fees for Service
Coming soon is the newest tax guide from Windstar Publishing’s Cross-Winds series, What You Need to Know About Honorarium Payments and Fees for Service. The guide, authored by Windstar experts Paula N. Singer, Esq. and Linda Dodd-Major, Esq. will:
- Explain U.S. tax and immigration rules that apply to acceptance of honorarium services and payment of fees for services
- Distinguish the honorarium exception for B visitors from immigration rules that authorize other foreign nationals to provide services as independent contractors
- Explain withholding and reporting requirements and procedures for possible exceptions
- Set forth standards and procedures that will aid organizations in complying with these rules in the current era of enforcement.
The Cross-Winds series provides easy-to-understand information about the complicated tax and immigration-related issues that apply to individuals involved in cross-border activities.
To receive notification when the book is available, e-mail publishing@windstar.com.
Free Webinar on the International Tax Navigator® and PeopleSoft Enterprise Financials AP Interface
Join Windstar on Wednesday, February 24th from 1:00 - 2:00 pm ET for a free webinar to learn about Windstar’s newest ERP interface between the Tax Navigator and PeopleSoft Financials.
The new interface makes NRA tax compliance easier than ever!
Users will benefit from:
- Automated generation of 1042-S file for all AP payments to foreign entities
- Efficient flow of data between Tax Navigator and PeopleSoft Financials
- Elimination of potential compliance inaccuracies due to manual data entry in two systems
- No need to enter duplicate payee information in both PeopleSoft and Tax Navigator
- Vendors are automatically set up with correct 1042-S status and withholding percentage
- Year-to-date payment information sent seamlessly to Tax Navigator for 1042-S processing
- Automatic PeopleSoft withholding rule creation to support complicated withholding requirements
The interface also supports reporting, fixed percentage, tiered percentage, and retroactive withholding requirements
Don’t miss the opportunity to learn more about the Tax Navigator and PeopleSoft Financials interface. Register today.
Recently Published Articles by Paula N. Singer
Paula N. Singer, Esq. recently had the following articles published:
- “U.S. Tax Rules for Paying Foreign Employees,” Tax Notes International, Tax Analysts, January 18, 2010
- “U.S. Tax Returns for Foreign Nationals,” Corporate Business Taxation Monthly, CCH, November, 2009
Visit the Windstar website for a complete list of articles published by Paula Singer.
Windstar Will Dock at the Following Events
Higher Education Users’ Group (HEUG) Alliance 2010
San Antonio Convention Center
San Antonio, TX
February 28 – March 3, 2010
Join Windstar’s Scott Annis and North Dakota State University System’s Karin Stinar in room 206A at 3:00 pm on Tuesday, March 2nd for a presentation on “Exception Time Processing for Foreign Nationals” (session number 27544 in the HRMS track).
* * * * * * * * * * * * *
Datatel Users Group (DUG) Conference and Expo
Gaylord National Resort and Convention Center
National Harbor, MD
March 28 – 31, 2010
Don’t miss Paula Singer's session on Nonresident Alien Taxation at 9:00 am on March 30th.
Look in future issues of Crow’s Nest or visit http://www.windstar.com/public/events.html for the latest in event information.
©Copyright 2010 by Windstar Technologies, Inc. Windstar reserves all rights to this electronic material. Information contained in this publication is based on the best information available at the time of publication. While believing the information in this publication to be accurate, Windstar accepts no legal responsibility for its accuracy.
Since 1995 educational
institutions, hospitals, research institutions, and corporations
have relied on Windstar Technologies, Inc. to deliver the expertise
to comply with the U.S. tax residency rules, tax rates, and special
tax exemption rules under the law and U.S. treaties. When government
agencies require information about foreign nationals in the workplace,
Windstar provides straightforward analysis and reporting. Comprehensive
software for analysis and reporting, expert knowledge, and unparalleled
customer service combine to make Windstar the first choice for nonresident
alien tax compliance.