Many people have started traveling for business purposes after these activities were temporarily suspended during the COVID-19 pandemic. Now might be a good time to review — and possibly simplify — how your company reimburses its workers for out-of-town lodging, meals, and incidental expenses.
One simplified alternative is the high-low method. Instead of reimbursing employees for the actual travel costs, this method provides fixed travel per diems. These amounts are based on IRS-approved rates that vary from locality to locality. Here are the details.
Under the high-low method, the IRS establishes an annual flat rate for certain areas with higher costs of living. All the locations within the continental United States that aren’t listed as “high-cost” automatically fall into the “low-cost” category. The high-low method may be used in lieu of the specific per diem rates for business destinations. Examples of high-cost areas include San Francisco, Boston, and Washington, D.C. (See the chart below for a complete list by state.)
Under some circumstances — for example, if an employer provides lodging or pays the hotel directly — employees may receive a per diem reimbursement only for their meals and incidental expenses. There’s also a $5 incidental-expenses-only rate for employees who don’t pay or incur meal expenses for a calendar day (or partial day) of travel.
The following items aren’t considered incidental expenses:
- Transportation between places of lodging or business and places where meals are taken, and
- The mailing cost of filing travel vouchers and paying employer-sponsored charge card billings.
Consider reimbursing employees separately for these expenses, and then deducting the amounts as ordinary business expenses.
If your company uses per diem rates, employees don’t have to meet the usual recordkeeping rules required by law. Receipts of expenses generally aren’t required under the per diem method. Instead, the employer simply pays the specified allowance to employees.
But employees still must substantiate the time, place, and business purpose of the travel. Per diem reimbursements generally aren’t subject to income or payroll tax withholding or reported on the employee’s Form W-2. It’s also important to note that per diem rates can’t be paid to individuals who own 10% or more of the business.
What’s New in 2022?
The IRS recently updated the per diem rates for business travel for the fiscal year 2022, which starts on October 1, 2021. Under the high-low method, the per diem rate for all high-cost areas within the continental United States is $296 for post-September 30, 2021, travel (consisting of $222 for lodging and $74 for meals and incidental expenses). For all other areas within the continental United States, the per diem rate is $202 for post-September 30, 2021, travel (consisting of $138 for lodging and $64 for meals and incidental expenses). Compared to the prior simplified per diems, both the high- and low-cost area per diems have increased by $4.
The IRS also modified the list of high-cost areas for post-September 30 travel. Hilton Head, S.C., has been added to the high-cost list, and Gulf Breeze, Fla., has been removed from the previous list of high-cost localities. In addition, certain tourist-attraction areas only count as high-cost areas on a seasonal basis. Starting on October 1, the portion of the year in which Jamestown/Middletown/Newport, R.I., is a high-cost locality has changed.
Important: This method is subject to various rules and restrictions. For example, companies that use the high-low method for an employee must continue to use it for all reimbursement of business travel expenses within the continental United States during the calendar year. The company may use any permissible method to reimburse that employee for any travel outside the continental United States, however.
For travel during the last three months of a calendar year, employers must continue to use the same method (per diem method or high-low method) for an employee as they used during the first nine months of the calendar year. Also, employers may use either:
- The rates and high-cost localities in effect for the first nine months of the calendar year, or
- The updated rates and high-cost localities are in effect for the last three months of the calendar year, as long as they use the same rates and localities consistently for all employees reimbursed under the high-low method.
CAA Temporarily Suspends Limits on Meals Deductions
In terms of deducting amounts reimbursed to employees on a company’s tax return, employers normally must treat meals and incidental expenses as a food and beverage expense that’s subject to the 50% deduction limit on meal expenses. For certain types of employees — such as air transport workers, interstate truckers, and bus drivers — the percentage is 80% for food and beverage expenses related to a period of duty subject to the hours-of-service limits of the U.S. Department of Transportation.
Important: Under the Consolidated Appropriations Act (CAA), for 2021 and 2022 only, business meals provided by restaurants are 100% deductible, subject to the considerations identified in preexisting IRS regulations. Until the IRS issues additional guidance on the CAA COVID-relief provision, some issues will remain unclear. For example, do bars that serve food count as restaurants? Presumably, they do, but IRS guidance is needed to answer that question. Starting in 2023, the previous limits on deducting business meals while traveling will resume.
Time for a Change?
As your employees hit the road (or return to the friendly skies), it may be a good time to update your overall travel guidelines and consider switching to the high-low method. Though the list of high-cost localities varies slightly from year to year, this method can reduce the time and frustration associated with submitting traditional travel reimbursement forms. Contact us for more information.
High-Cost Area List for 2022
|State||Key City (Effective Dates*)|
|Arizona||Sedona (October 1-December 1; March 1-April 30; and September 1-September 30)|
|California||Los Angeles (October 1-October 31; January 1-September 30)|
|Mill Valley/San Rafael/Novato (October 1-October 31; June 1-September 30)|
|Monterey (June 1-August 31)|
|Napa (October 1-November 30; April 1-September 30)|
|San Diego (February 1-July 31)|
|San Mateo/Foster City/Belmont|
|Sunnyvale/Palo Alto/San Jose|
|Colorado||Aspen (October 1-March 31; June 1-September 30)|
|Crested Butte/Gunnison (December 1-March 31)|
|Denver/Aurora (October 1-October 31; April 1-September 30)|
|Grand Lake (December 1-March 31)|
|Silverthorne/Breckenridge (December 1-March 31)|
|Delaware||Lewes (July 1-August 31)|
|District of Columbia||Washington, D.C.|
|Florida||Boca Raton/Delray Beach/Jupiter (December 1-April 30)|
|Fort Lauderdale (January 1-April 30)|
|Fort Myers (February 1-March 31)|
|Fort Walton Beach/DeFuniak Springs (June 1-July 31)|
|Key West (October 1-July31)|
|Miami (December 1-March 31)|
|Naples (December 1-April 30)|
|Vero Beach (December 1-April 30)|
|Georgia||Jekyll Island/Brunswick (March 1-July 31)|
|Illinois||Chicago (October 1-November 30; April 1-September 30)|
|Maine||Bar Harbor/Rockport (July 1-August 31)|
|Kennebunk/Kittery/Sanford (July 1-August 31)|
|Maryland||Ocean City (July 1-August 31)|
|Falmouth (July 1-August 31)|
|Hyannis (July 1-August 31)|
|Martha’s Vineyard (June 1-September 30)|
|Nantucket (June 1-September 30)|
|Michigan||Petoskey (July 1-August 31)|
|Traverse City (July 1-August 31)|
|Montana||Big Sky/West Yellowstone/Gardiner (June 1-September 30)|
|New York||Lake Placid (July 1-August 31)|
|New York City (October 1-December 31; March 1-September 30)|
|Oregon||Portland (October 1-October 31; June 1-September 30)|
|Seaside (July 1-August 31)|
|Pennsylvania||Hershey (June 1-August 31)|
|Philadelphia (October 1-November 30; March 1-June 30; September 1- September 30)|
|Rhode Island||Jamestown/Middletown/Newport (June 1-August 31)|
|South Carolina||Charleston (October 1-November 30; March 1-September 30)|
|Hilton Head (June 1-August 31)|
|Utah||Park City (December 1-March 31)|
|Virginia||Virginia Beach (June 1-August 31)|
|Wallops Island (July 1-August 31)|
|Vancouver (October 1-October 31; June 1-September 30)|
|Wyoming||Cody (June 1-September 30)|
|Jackson/Pinedale (June 1-September 30)|
* If no effective date is listed, the location is a high-cost area all year long.