A short-term assignment is any business travel that is expected to last, and does in fact last, less than one year. The reimbursements for away-from-home expenses are taxed like reimbursements for any other business trip. The reimbursements must be substantiated under an accountable plan or will be taxable to the employee.
What happens if the expected length of the short-term assignment changes?
Once the expected length of the assignment extends beyond one year, the travel reimbursements become fully taxable to the employee.
An employee was sent to the US for an assignment expected to last 11 months. In the 10th month the assignment was extended to 13 months. The travel expense reimbursements become taxable from the 10th month - when the expected assignment length changed.
The same facts as above except the assignment was terminated early upon reaching the 11th month. The answer is the same as the taxability is determined based on the expectations - not that the assignment was less than one year.
What documentation is required to substantiate the expected assignment length?
No specific documentation is required. An email from the manager or an assignment letter from HR are both commonly used to document the expected assignment length. Ideally, this documentation will be provided before the start of the assignment.
Documentation is very critical to support the employer's presumption that an assignment is expected to last less than one year - particularly when assignments are extended. A lack of contemporaneous documentation leads to a presumption that an assignment is long-term or indefinite where all travel reimbursements are subject to tax.
What kind of travel expense reimbursements are not taxable?
Expenses substantiated under an accountable plan are not taxable. If you are a US company, then your expense account reimbursement procedures may already meet these requirements. Basically, the employee must turn in receipts for all reimbursed expenses. If no receipt is provided but a reimbursement is made, the payment becomes taxable.
Typical travel expenses include airfare from the home location, hotel, meal and car rental expenses.
Can the employer use per diems instead of reimburse actual expenses?
Rather than reimburse actual expenses, per diems may be paid at or below the maximum rate for that location. The per diem can only be paid for each day away-from-home. The per diems must be paid at a daily rate rather than a monthly rate. An employee typically notes the location and amount on an expense report which is reimbursed at the same time as other expense reimbursements.
What expenses are considered reimbursed by a per diem?
The IRS maximum per diem rate contains a component for lodging as well as, meals and incidental expenses (M&IE). The reimbursement of M&IE is treated like any other meal and entertainment expense - only half is deductible on the employer's tax return.
What expenses are not considered reimbursed by a per diem?
Airfare to the job location and car rental are not included in the maximum per diem.
We reimburse the employee's housing expenses. Can a per diem still be paid?
The per diem component for M&IE only may be reimbursed.
What is the maximum per diem amount for this job location?
The per diem amounts continously change. The amounts may go up as well as down. For current rates, see the Reference Sources page.
My company's foreign parent wants to pay a flat monthly allowance which is not taxable in that country. Will this meet the per diem requirements?
The per diems can only be paid on a daily basis. Monthly allowances will be taxable. You should consider changing the terms of the assignment so that it meets the US requirements.
We want to pay to pay a per diem that exceeds the maximum allowed amount. How does this work?
You should track the amount above the maximum per diem amount and include this payment in reported compensation. Failure to include the excess amount in wages will cause the full payment to become taxable. See Revenue Ruling 2006-56.
My employee brought his family with him on his short-term assignment. What do we do?
This can be common in some cultures but difficult for Americans to understand. Be sure that the employee is maintaining a home in the foreign location. Double-check the documentation supporting the short-term nature of the assignment.
Also be sure that any expenses reimbursed for family members are included in reportable compensation. These expenses could include excess housing costs for the additional family members, airfares or even schooling.
Poor documentation in this situation could cause the employee to be considered itinerant rather than on a short-term assignment. All payments would then be taxable.
My company is reimbursing travel costs for clients visiting the US. Do these expenses need to be reported on a W-2?
If the expense are reimbursed under an accountable plan, then the payments are not reportable compensation.
If the reimbursements do not meet these requirements, your clients should pay them directly. Your company should avoid paying taxable compensation to non-employees. You should discuss comon-law employee issues and Form I-9 requirements with your immigration attorney.
- Employer Questions
- ►Short Term Assignments
- ►Tax Attributes of Specific Visas
- ►Certifying Acceptance Agent
- ►Crewmember Taxation - OCS
- General Tax Questions
- ►Tax Return Filing Requirements
- ►Number of Days in the US
- ►Tax Residence
- ►Year of Arrival or Departure
- ►Substantial Presence Test
- ►Personal/Dependent Exemptions
- Other Resources and Forms
- ►Foreign Nationals Book by John Allis
- ►Reference Sources
- ►Links to other Websites
- ►Foreign Nationals Tax Forms