This article originally appeared in the NAFC March 2019 newsletter.
The Tax Reform and Jobs Act (TCJA) was the most comprehensive overhaul of the tax code in our lifetime, if not ever. We are just weeks away from the first tax filing deadline for returns that are fully impacted by these law changes. One change that could drastically impact truck drivers is the inability to deduct unreimbursed business expenses. As a result of this adjustment, many carriers have implemented per diem programs as a way to get tax free dollars to drivers. Conversely, companies that have not instituted per diem programs might have disappointed drivers as we get closer to the tax filing deadline, and drivers realize that this deduction is a thing of the past.
Prior to TCJA, an over the road (OTR) driver could deduct travel expenses as unreimbursed business expenses, subject to an AGI limitation. For a driver that was away from home for a substantial amount of the year, this deduction could have been well over $15,000, having a material impact on a driver’s annual tax liability.
Hopefully, between decreased tax rates, the increased standard deduction, and the increased child tax credit, most drivers will see a decrease in taxes this year. However, now that there is no longer a tax deduction for unreimbursed business expenses, it makes more sense than ever to consider implementing a per diem program.
What is a Per Diem Program?
A per diem program is a plan that enables up to $66 per night away from home ($71 for outside the continental U.S.) to be disbursed to OTR drivers, as opposed to having drivers turn in receipts for direct expenses. It reduces administrative burden, while providing additional cash to drivers on a pre-tax basis. To qualify, companies must have an accountable plan, which would include these requirements:
- The travel must have a business purpose
- There should be logs showing that you adequately account for the eligible amount within a reasonable period of time
- The amount should be tested regularly to ensure that drivers are not exceeding the allowable amount
- Employees must return any excess reimbursement or allowance within a reasonable period of time or treat the overage as compensation.
As previously mentioned, the driver receiving the per diem must be over the road, meaning out overnight, where they cannot reasonably be expected to complete a route without sufficient rest.
There are benefits of having a per diem program both for the driver and the carrier. Not only is the driver reducing their federal and state tax by receiving a tax free disbursement, but they also avoid paying FICA and Medicare tax as well. Additionally, the carrier is able to reduce the employer portion of payroll taxes. For example, if a driver is paid 55 cents per mile over 2,500 miles, but is able to convert 10 cents per mile to a per diem payment, the driver would save $43 a week in federal and state taxes (assuming a combined rate of 17 percent) in addition to saving $19 a week in FICA and Medicare tax. (See chart below). Furthermore, the employer would save an equal amount of FICA and Medicare tax.
There are further implications to restructuring compensation. Transportation companies are only able to deduct 80 percent of per diems paid to drivers. Depending on the carrier’s tax situation, this reduced deduction may be less impactful. For instance, company owners with suspended losses may not be impacted by the lost deduction for years. ESOP carriers would also be less impacted, since ESOPs are not taxpayers.
There may be some additional unintended consequences for companies instituting a per diem program. While reducing tax to the company and the drivers seems like a win-win, drivers should consider that, since their reportable income will decrease, their ability to obtain financing may be impacted. Other benefits, such as 401(k) contributions that are based on compensation, will also be impacted since per diems are not considered compensation. Unemployment insurance is also based on taxable wages and would not include amounts received as per diem.
Despite some of the negative implications, having a per diem program is still an extremely beneficial tool for many carriers. However, to gain support, it is key to have open communication with drivers to educate them on the reason for the program and openly share how all parties are impacted. This can be done at driver town hall meetings and by providing them with templates that help visualize the changes and model the reduced taxes. Some large carriers have a portion of their recruiting and retention website solely dedicated to explaining how their per diem program works, along with a FAQ section and a feedback box for open dialogue.
Jeremy Reymer, founder and CEO of DriverReach, a driver recruitment management system, has spent the last 20 years focusing on driver staffing, retention, and recruitment, and has seen firsthand how imperative the communication on rollout is to carriers. “In an industry so driven by obtaining and retaining talent, open communication around something as critical as how you compensate your biggest asset (your drivers) cannot be overemphasized,” Reymer said. “In my experience, the companies that benefit the most when implementing a per diem program start with open communication lines with the people impacted by the change.”
While not every transportation company is a good candidate or even eligible to institute a per diem program, if your OTR drivers are disappointed by their refunds on April 15, it might be time to crunch the numbers and see if you can save them some additional tax dollars. Staying competitive on driver compensation has never been more important. Implementing a per diem program might give your company a boost in the right direction.