Per Diem
In labor and taxation legislation, "Per Diem" refers to a daily allowance or payment that is typically provided to employees or individuals to cover expenses incurred while traveling for work-related purposes. The term "Per Diem" is derived from Latin, meaning "per day."
Sometimes, the term "per diem" also denotes a daily payment model for temporary or on-demand jobs, such as for locum nurses or relief teachers, however, this meaning is not a subject of the following article.
Key aspects of Per Diem
In the context of labor and taxation legislation, Per Diem includes:
Travel expenses
Per Diem is intended to cover expenses for meals, lodging, transportation, and incidental expenses that employees or individuals may incur while away from their usual place of work. It simplifies the reimbursement process by providing a fixed daily allowance rather than requiring employees to submit receipts for each expense.
Fixed rates
Per Diem rates can vary by location and are often set by government agencies or employers based on local cost-of-living and business travel considerations. These rates may be different for domestic and international travel.
Taxation
Per Diem payments can have implications for income tax purposes. In many countries, including the United States, the tax treatment of Per Diem depends on whether the payment is considered accountable or non-accountable.
Under an accountable plan, Per Diem payments are not included as taxable income for the employee. However, the employee must provide an expense report detailing each expenditure's time, place, and business purpose. Any unused funds are typically returned to the employer.
If Per Diem payments don’t meet the requirements of an accountable plan, they may be treated as taxable income, subject to withholding and reporting, and are called non-accountable.
Both employers and employees should be well aware of the specific regulations and guidelines regarding Per Diem in their jurisdictions. Failure to comply with tax and labor laws related to Per Diem can lead to tax liabilities and legal issues. Therefore, many organizations have well-defined Per Diem policies to ensure proper compliance and documentation.
Limits, regulations, and specific rules
Some countries and employers impose limits on Per Diem rates to prevent excessive or inappropriate expenses. Additionally, regulations may specify when Per Diem can be provided, such as during business travel but not for regular daily commuting.
Certain industries, such as the trucking and construction sectors, have specific Per Diem rules and rates due to the nature of their work, which often involves extensive travel and lodging expenses.
Employers and employees must maintain accurate records of Per Diem payments and related expenses to ensure compliance with tax and labor laws.
When employees travel internationally, Per Diem rates can vary significantly between countries, and currency exchange rates may also affect the calculation of daily allowances.
How to work out Per Diem?
Per Diem amounts are predetermined daily rates given to staff for business-related travel expenses. Issuing these rates simplifies expense tracking and negates the need for extensive expense reports or receipt collections. The organization's travel guidelines should provide clear directives on per diem provisions.
To compute per diem: (1) ascertain the organization's Per Diem rates; (2) verify the eligible days (and nights) of travel; (3) multiply the per diem rate with the number of days.
For instance, let's consider a sales representative traveling for three days, with a two-night hotel stay, to conduct training and sales pitches. Given a daily travel allowance of $50 and a hotel rate of $150 per night:
($150 x 2 nights) + ($50 x 3 days) = $450
In the U.S., firms can take cues from the GSA to determine federal per diem rates. Updated annually, these rates factor in lodging costs, food expenses, and other variables.
Per Diem: by day or night?
Per diem allocations differ based on the nature of expenses. Daily Per Diem covers meals, commuting, and other daily costs. Nightly Per Diem addresses accommodation costs.
Tax aspects of Per Diem
In the U.S., Per Diem is generally tax-exempt. However, specific scenarios can have tax implications, as directed by the IRS. Typically, Per Diem becomes taxable if it surpasses the federally set Per Diem cap. If it exceeds this limit, only the excess amount becomes taxable.
Under specific conditions, employees can avail tax deductions on per diem, especially if adhering to GSA rates. Though the IRS allows businesses to deduct legitimate employee travel expenses, companies must maintain a verifiable plan to substantiate these deductions.
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Reimbursing business-related expenses is crucial for maintaining employee satisfaction and mutual trust. At MWDN, we facilitate a seamless experience for finance departments, ensuring international compliance.
Post-tax deductions FAQ
Post-tax deductions impact everyone in an organization, from the payroll department to individual employees. Hence, a clear understanding of the concept and its role in payroll is essential. Here are some frequently asked questions that should help you grab the concept of post-tax deductions.
1. What are post-tax deductions?
Post-tax deductions, often called after-tax subtractions, are amounts deducted from an individual’s earnings after necessary tax withholdings. Common examples include Roth 401(k) contributions, life insurance premiums, union contributions, and disability insurance premiums.
2. What types of deductions are considered post-tax deductions?
Common types of post-tax deductions include Roth 401(k) contributions, Roth IRA contributions, charitable donations, union dues, certain insurance premiums (those for supplemental life insurance or certain disability insurance policies), court-ordered deductions (child support or alimony payments), and after-tax investments.
3. How are post-tax deductions different from pre-tax deductions?
The key difference between pre-tax and post-tax deductions is when they are applied in relation to income tax calculations. Pre-tax deductions reduce taxable income and provide immediate tax benefits, while post-tax deductions are applied after taxes are withheld and do not reduce taxable income.
4. Are post-tax deductions subject to income tax?
No, post-tax deductions are not subject to income tax because they have already been subjected to income tax. When post-tax deductions are taken from an employee's paycheck, they are subtracted from the employee's net income, which is the income remaining after income taxes have been calculated and withheld.
In other words, the money used for post-tax deductions has already been taxed as part of the employee's gross income. Therefore, post-tax deductions are made with after-tax dollars, and no additional income tax is applied to them.
5. Can I change my post-tax deductions?
The ability to change post-tax deductions is influenced by employer policies, the type of deductions involved, and any qualifying life events that may allow for adjustments outside of regular enrollment periods. It's advisable to familiarize yourself with your employer's specific policies and consult with HR or payroll representatives for guidance on making changes to your deductions.
6. Is there a limit to how much I can contribute to post-tax retirement accounts?
The annual contribution limits for post-tax retirement accounts, such as Roth IRAs or Roth 401(k)s, are set by the government and may change each year. Here are some contribution limits as of 2023.
Roth IRA (Individual Retirement Account)
For the tax year 2023, the annual contribution limit for a Roth IRA is $6,500 for individuals under the age of 50 and $7,500 for individuals aged 50 and older (including catch-up contributions).
These limits are subject to income restrictions, and contributions may be reduced or phased out for individuals with higher incomes.
Roth 401(k) or Roth 403(b) Plans
Roth 401(k) and Roth 403(b) plans offered by employers have higher contribution limits than Roth IRAs.
For the tax year 2023, the annual contribution limit for these plans is $22,500 for individuals under the age of 50, with an additional catch-up contribution limit of $7,500 for those aged 50 and older.
Roth 457(b) Plans (for government employees)
Contribution limits for Roth 457(b) plans can vary by employer and may be influenced by the age of the account holder.
For 2023, individuals under age 50 could contribute up to $22,500.
7. Can I claim a tax deduction for post-tax charitable donations?
Depending on your tax situation and the specific tax laws in your country, you may be eligible to claim deductions for charitable donations on your income tax return. In the US, you can claim a tax deduction for post-tax charitable donations, but there are specific rules and requirements that must be followed. Consider the following key points to stay on the safe side.
Itemizing deductions. To claim a tax deduction for charitable donations, itemize your deductions on your federal income tax return using IRS Schedule A (Form 1040).
Qualified charities. The charitable organization to which you make contributions must be a qualified tax-exempt organization under Internal Revenue Code. Most established charities, religious organizations, and nonprofit groups fall into this category.
Documentation. Keep records of your charitable contributions, including receipts or written acknowledgments from the charity.
Limits on deductions. You can generally deduct up to 60% of your AGI for cash contributions to qualified charities.
Non-cash donations. If you donate non-cash items, such as clothing or household goods, you may also be eligible for a deduction.
Special deduction for 2021. Due to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed for an above-the-line deduction of up to $300 for cash charitable contributions made by eligible individuals who did not itemize deductions for the 2020 tax year. This provision was extended for the 2021 tax year, allowing for an above-the-line deduction of up to $300 ($600 for married couples filing jointly) for cash donations to qualified charities, even if you take the standard deduction.
8. Do W-2s show after-tax deductions?
No, W-2 forms do not typically show after-tax deductions. W-2 forms provide a summary of an employee's taxable income and the various taxes and pre-tax deductions that have been withheld during the tax year. After-tax deductions, which are subtracted from an employee's net (after-tax) pay, are not included on the W-2 form because they do not affect the calculation of taxable income or tax withholding.
Yet, voluntary after-tax contributions to certain non-Roth pension plans might appear in Box 14.
9. What are statutory deductions?
Statutory deductions, also known as mandatory deductions, are deductions from an individual's income that are required by law. These deductions are typically enforced and regulated by government authorities, and employers are obligated to withhold and remit the specified amounts to the appropriate government agencies.
Statutory deductions are an essential part of an individual's compensation and include income tax, social security tax (FICA), medicare, unemployment insurance, workers' compensation insurance, and child support and alimony.
10. How to make your global payroll easier?
If you’re navigating global payroll complexities, MWDN is here to help. As an outstaffing company hiring tech specialists around the globe, we provide assistance with payroll and management of international employees and contractors, ensuring law compliance. Whether you need a small remote team or a giant office offshore, we've got solutions tailored for you.
Professional employment organizations (PEO)
A PEO is a firm that provides comprehensive HR solutions for small to mid-sized businesses. Partnering with a PEO allows these businesses to outsource a range of functions, including payroll administration, employee benefits, HR tasks, and compliance with local and federal regulations.
At the heart of the PEO arrangement is a co-employment relationship. This means the PEO co-hires the client's employees and becomes their administrative employer, while the client company remains the "worksite" employer, retaining control over day-to-day operations and management of employees.
Services provided by a PEO
Engaging with a PEO allows companies, especially smaller ones, to cost-effectively outsource many of their human resource tasks and focus on their core operations. The services a PEO provides typically include:
Payroll administration. PEOs handle all aspects of payroll, from calculating pay based on hours worked to withholding taxes, managing deductions, and distributing paychecks. They also handle payroll-related tax filings and ensure compliance with local, state, and federal regulations.
Employee benefits management. PEOs can manage and administer a wide range of employee benefits. Due to their economies of scale, they can often negotiate better terms for health insurance, dental and vision coverage, retirement plans (like 401(k)s), life insurance, and other benefits.
HR compliance and consultation. PEOs help businesses stay compliant with ever-changing labor laws and employment regulations. This includes assistance with workplace posters, employment practices, and employee handbooks.
Workers' compensation and risk management. PEOs provide workers' compensation coverage, manage claims, and offer risk management tools to reduce workplace hazards and potential liabilities. They also assist with OSHA compliance.
Recruitment and talent management. Some PEOs offer support in recruiting and talent management, helping businesses find, hire, onboard, and train new employees. They may also assist with performance reviews and employee development programs.
Employee training and development. PEOs can offer training programs on topics ranging from workplace safety and sexual harassment prevention to leadership development and skills training.
Employee relations and dispute resolution. PEOs provide guidance on employee relations issues, helping resolve conflicts and ensuring a harmonious workplace environment.
Termination and unemployment. In the event of employee terminations, PEOs can assist with exit interviews, handle unemployment claims, and ensure that terminations are done in compliance with the law.
Reporting and analytics. Many PEOs offer robust reporting tools, giving businesses insights into HR metrics, payroll data, benefit utilization, and more.
Time and attendance management. PEOs often provide systems to track employee hours, manage time-off requests, and ensure accurate and compliant timekeeping.
Understanding PEO's co-employment
Businesses, from accountants to tech startups, can collaborate with PEOs. In this partnership, both the PEO and the business split the roles and responsibilities of employment. This division is detailed in a PEO agreement. While the business continues its usual operations, the PEO handles HR-related tasks, like payroll. This arrangement simplifies compliance for businesses and reduces risks.
PEO pricing
The pricing models vary between PEOs, but they generally fall into a few common categories. One of the most common pricing structures is a percentage of the company's total payroll. For instance, a PEO might charge 3% of the total monthly payroll. So, if the monthly payroll is $100,000, the PEO's fee would be $3,000.
Some PEOs charge on a per-employee basis. The cost might be a fixed monthly fee for each employee on the payroll, such as $100/month per employee. This model is more predictable than the percentage-based one, especially for companies with higher average wages.
Other PEOs opt for a flat administrative fee plus the actual cost of services used. For instance, a PEO might charge a flat fee of $1,000 per month plus the actual costs of benefits, workers' compensation, etc.
As businesses scale up their workforce, some PEOs offer tiered pricing or volume discounts. The per-employee rate might decrease as the number of employees increases.
PEO pros and cons
While PEOs offer numerous advantages, especially in administrative relief and access to expertise, they might not be the right fit for every business. Here’s a quick recap of PEO’s advantages and disadvantages.
Pros
Cost savings. PEOs can often negotiate better rates for health insurance, workers' compensation, and other benefits due to their purchasing power, resulting in potential cost savings for businesses.
HR expertise. PEOs provide businesses with access to HR experts, ensuring compliance with local, state, and federal regulations, reducing the risk of legal issues or penalties.
Administrative relief. Outsourcing HR tasks, payroll, and benefits administration can free up time for business owners to focus on core business operations.
Access to better benefits. PEOs can offer a wider range of benefits than a small business might be able to provide on its own, helping to attract and retain top talent.
Risk management. PEOs help manage risks related to employment, ensuring businesses are compliant with employment laws and regulations. They can also assist with workplace safety programs to reduce accidents and workers' compensation claims.
Scalability. PEOs allow businesses to scale their HR operations more easily, adapting to the changing needs as the business grows or contracts.
Cons
Loss of control. While partnering with a PEO, some businesses may feel they have lost some control over certain HR functions or decision-making processes.
Cost concerns. Even though PEOs can lead to cost savings in some areas, the fees associated might be a concern for some businesses. It's essential to weigh the benefits against the costs.
Contractual commitments. Some PEOs might require long-term contracts, limiting a company's flexibility if their needs change.
Potential cultural impact. With an external organization handling HR, there might be concerns about maintaining the company's unique culture and values.
Data security. Sharing employee data with an external organization always carries some risk. It's crucial to ensure that the PEO has robust data security measures in place.
Potential misalignment. If a PEO's offerings don't align well with a company's specific needs or the business operates in a highly specialized sector, the partnership might not be as beneficial.
Note! In the US, PEOs can get accreditation. The IRS oversees the CPEO program, and ESAC offers independent third-party accreditation. Many PEOs in the US are NAPEO members.
PEO vs EOR (Employers of Record)
While PEOs share employment responsibilities, EORs take complete charge as employers, especially on an international scale. PEOs aid in HR and payroll for local workers. In contrast, EORs handle all employment aspects, including legalities, for global hires. EORs, like MWDN, operate in numerous countries, allowing businesses to hire globally without diving deep into local labor laws.
If you have a local team, a PEO can amplify your HR operations and ensure you comply with local laws. For international hiring, consider an EOR. If you need flexibility in both local and international hiring, services like MWDN might be your best bet.
