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Subject:Re: The Technical Writer's Freelancin From:Peter Kent <71601 -dot- 1266 -at- COMPUSERVE -dot- COM> Date:Fri, 3 Nov 1995 14:38:33 EST
>> Peter: Along these lines, another issue to discuss might be rule
#1542. Excuse me if this is already in your book; I haven't had time
to look at it again.
I posted a query on this subject a few weeks ago after an Atlanta
recruiter called and told me I could declare $19.60 of a $24 hourly
fee as nontaxable per diem if I maintained a home in another state.
This would have translated into $784 of gross nontaxed pay per week!
I didn't get many responses to my post. Do you know anything about
I discussed this issue in the book, though it's several years since I've
looked at it. I'm not sure what rule #1542 is. However, the idea of a
non-taxable per diem is almost always incorrect. Sure, you can claim it, but
you'll get in trouble if you are audited. The law may have got easier on this
over the last few years, though I doubt it--the IRS was actually tightening up
on this, making it harder to claim a per diem. Here's what I originally wrote
in the book (it's a bit of a jumble; I've recently received the files back
from the publisher, and haven't had time to reformat them yet):
Per Diems and Business Travel Expenses
Many agencies pay a per diem, usually to road-shoppers, contractors who
travel from other areas of the country to take a contract. Per diem means per
day, of course, but as I've mentioned elsewhere, the technical service
industry doesn't seem to know that. If an agency quotes you a rate and then
tells you they also will pay a $150 per diem, don't get excited--they mean
$150 per week, not per day.
Anyway, most contractors assume the per diem is a nontaxable
reimbursement for travel expenses, but most contractors are wrong. While there
are some situations in which this may be true, usually the per diem is taxable
In response to an article I had written in PD News one contractor wrote
to state that "when one is working on the road, away from one's home
overnight, expenses may be deductible." The writer didn't explain exactly what
he meant by "away from home overnight," but if he meant that when someone
travels to another town on business and stayed overnight (or even a day or
two), then the expenses would be deductible. But if he was referring to the
road-shopper, the contractor who usually jumps from location to location and
has no regular workplace, then the commuting would not be deductible. The
following comes from my response, published in PD News.
Most of this talk about how to deduct expenses and report PD (per diem) is
irrelevant. Most contractors working away from what they regard as their home
are probably not eligible to deduct travel and living expenses. Even if they
receive a PD it should be reported as taxable income. Why? Because usually the
IRS will regard where you work as your tax-home. I haven't done a survey, of
course, but I don't believe most contractors' work situations fit the criteria
laid down by the IRS for claiming living expenses.
The IRS intended travel and lodging expenses to be deductible for people
temporarily out of town. Most "temporary" stays are a few days or weeks, but
could be as long as two years (if, for example, a company you work for asks
you to work temporarily in a subsidiary in another town). However, most
contractors are not in this position. As J. K. Lasser s says, if you "do not
have regular employment where you live ... the IRS will disallow the deduction
on the grounds that the expenses are not incurred while away from home: the
temporary home is the tax-home."
Many contractors, especially single people, do not maintain houses or
apartments in their home towns: "Bachelors will find it difficult to get the
deduction because they often do not keep regular residences," says J. K. Some
contractors have trailer homes, and move their homes with them. In such a case
"you move from project to project and you have no other established home ...
each location becomes your principal place of business and, therefore, you are
not 'away from home.''' This would apply even if you didn't physically move
your home with you, but still traveled from job to job around the country.
Even if you maintain a house or apartment in your home town, you may
still not be eligible to deduct expenses. Even if your spouse or children live
in your home town, you may still be out of luck, especially if you have not
recently worked there.
The IRS considers several circumstances when determining tax-homes. The
more of the following factors that fit your case, the less chance you have of
getting the IRS to accept your deduction.
1 You have no regular employment in your home town. 2 You do not
maintain a home in your home town. 3 You move from job to job in
different locations. 4 You have no spouse or children living in your
home town. 5 Your present contract is indefinite, or scheduled to last
two years or more. 6 You did not work in your home town before the
present contract. 7 You don't intend to return to your home town after
your present contract. 8 You are not continuing to seek employment in
your home town.
Scan through a copy of PD News and look at the Length of Contract
listings. If a listing is "indefinite" or over a year, the per diem is almost
certainly not tax-free (perhaps the agency doesn't withhold taxes from it, but
the IRS regards it as taxable). If it says two years or more, it is
"considered an indefinite stay, regardless of the facts or circumstances,"
says the IRS--so per diem would be taxable.
My most recent copy of J. K. Lasser's tells me that the IRS will disallow
a travel expense deduction if you have no regular job in your home town, but
that the tax court has allowed such a deduction. However, an appeals court has
overturned the decision, agreeing with the IRS. (Unlike most crimes, in which
the state considers you innocent until proven guilty, where tax "crimes" are
concerned you are effectively considered guilty until proven innocent. The IRS
says you owe them money. If they don't change the assessment during their
appeals procedure, you can pay them or take them to court. If you go to court
you are suing them, so the court regards the IRS as innocent until you can
prove they are wrong! Thus, an appeals court can overturn a tax court decision
and decide in the IRS's favor.)
Does all this mean that you cannot deduct mileage driven to work, or that
you must pay taxes on per diems? No. After all, many contractors throughout
the country do deduct mileage, and don't pay taxes on per diems, and get away
with it for years. What it means is that if you get audited by an auditor who
knows the law, you will lose the deduction and may have to pay penalties.
Many contractors get away with bending the rules slightly, or even
breaking them completely. They take advantage of every grey area, and the fact
that the IRS can't know their exact work situation unless it audits them. So
you will find contractors who tell you the points I have raised are wrong
(because they've seen so many others deducting these expenses that I must be
wrong), or that it doesn't matter, because you won't get caught.
But taking every liberty with the tax system possible may be, as one
contractor put it, "killing the goose that laid the golden egg." Too many
contractors have avoided paying taxes, or taken illegal deductions, so the
IRS--and even state regulators--is out to clean up the mess. The easiest way
is to remove the people causing the problem: stop independent contracting, and
force the contractors to work as employees of agencies or of the clients. Many
individual states have already clamped down on independents, making it
difficult to find a company that will risk an independent contract. The
agencies have reaped a bonanza, and often support the IRS's efforts. If
independents went by the letter of the law there would be no incentive for the
IRS to go after them, though this may be wishful thinking--it's probably too
late. (But read chapter 21--there are still things you can do to avoid legal
I need to update this for the new book, of course. If you have any solid
information--such as references to particular documents--I'd be very grateful
if you could let me know.
I'm sending this to the TECHWR-L list, too; so if anyone on that list has any
relevant info, please let me know. (However, please don't send a message
saying, "no, that's not right," without explaining why it's not correct. I've
got into this argument before with technical writers, who claim that I can't
be correct because they haven't been paying taxes on the per diem, or they
know people who aren't paying taxes on the per diem, or whatever. Not one of
these people has been able to refer me to the document that shows that they
are correct in their interpretation of the law. I think not paying taxes on
the per diem is a common--but illegal--practice.)