Kelly M. Phillips, CPA
In the most sweeping tax reform since the Reagan era, one of the most advantageous deductions
for truckers was removed with a stroke of the President’s pen. The deduction of per diem as an
unreimbursed business expense was, for many truck drivers and their families, a sure bet for
significantly lower tax liability come tax time. This new legislation, however, removes
unreimbursed business expense as a deduction not only for truck drivers, but across the board. What does it all mean?
First let’s explore the situations most commonly seen under the old laws. There were three
options: 1) an employee with W-2 wages who was not reimbursed for travel expenses and
therefore claimed a per diem amount as a miscellaneous itemized deduction subject to a 2%
threshold on his/her personal return; 2) an employee with pay that was a combination of per-
diem payments and taxable wages; and 3) an owner operator who received a gross or net 1099-
MISC who then calculated the amount of per diem and reported it on their Schedule C or other
business entity return.
Drivers who were W-2 employees of a company could receive compensation with all wages
being taxable and then take the per diem on their personal returns as an unreimbursed business
expense. This was probably the most common situation encountered when working with trucking
companies. For a driver who worked a full year, the per diem component was usually a large
enough amount to all but guarantee that the 2% miscellaneous itemized deduction threshold was
more than satisfied. The second method of splitting compensation between taxable wages and
per diem allowed the employer to reduce their FICA obligation, since the per diem portion of the
compensation is not subject to FICA tax. The driver got the same, or sometimes more, take-
home pay compared to having all W-2 taxable wages.
If a driver was treated as an owner operator, he/she received a 1099-MISC reporting the gross
settlements for the year. The proper way to prepare the 1099 is to include all payments and have
drivers deduct all of the items reported to them on their settlement sheet as business expenses.
(This is most commonly done on a Schedule C, but some owner operators utilize a different
business formation.) Some companies prepared the 1099-MISC with the net amounts paid to the
driver, but regardless of the way the amount reported was calculated, the driver could then
prepare the Schedule C, calculate how many nights were spent away from home in the
production of income, take the special transportation per diem rate of $63 per full day of travel,
and calculate the amount allowed as a per diem deduction after applying the 80% deductibility
rule to the total. This deduction reduced the amount of federally taxable income and, more
importantly, the amount of income subject to self-employment tax, which is 15.3% on all self-
employment income regardless of what the individual’s taxable income ends up being. The
reduction of tax liability in the current year would also reduce the amount of estimated tax
payments required to be paid throughout the year so the driver could avoid penalties for
underpayment of estimated tax.
Now, in 2018, without the option of deducting per diem as a miscellaneous itemized deduction,
what are drivers and trucking companies supposed to do in order to keep their and/or their
drivers’ tax burdens from becoming significantly more substantial?
The owner-operator who has his payments reported to him on a 1099-MISC is largely unaffected
by this new development. He will continue to calculate his per diem and take a deduction for
80% of that amount on his Schedule C or other tax form as required by his entity choice.
The employee who receives a W-2 and per diem payments as part of his compensation will also
not see a change in the way he is paid, although his tax liability might be reduced by the new tax
brackets. While the new law does address and change the deductibility of some meals and
entertainment that were previously 50% and 100% deductible, it does not change the 80%
deduction available to those in the transportation industry, which includes not only trucking but
air, train and water transportation industries. Keep in mind that the per diem portion of the pay
should be accounted for separately and not have any withholdings.
The major hit will be felt by drivers who are paid the most common way – with wages fully
reportable as taxable, and using their Schedule A, were able to reduce their taxable income with
the deduction of per diem on Schedule A. As this is no longer allowed, the driver will be looking
for a solution to his problem of an increased tax liability without a change in his pay. If
employers wait until the end of the year to try and fix drivers’ pay structure it will be too late;
thus, it is advantageous for employers and drivers to look at how their compensation package is
structured and make changes beneficial to both parties proactively. If this item on your to-do list
keeps getting pushed to the bottom, drivers may look elsewhere to find a compensation package
that puts them in the Pre-Tax- Reform position they were able to achieve with itemizing. No
matter how significant the change in tax rate brackets might be under the new legislation, a
filing-single driver who previously took 300 days of per diem (300 x $63 = $18,900), which
equates to $15,120 as the amount deductible, would be hard pressed to pay less tax in 2018 under
his 2017 pay structure. Since the single standard deduction is $12,000 under the new tax bill, this
driver would have had at least two to four thousand dollars of additional deduction, before taking
into account any other Schedule A deductions, and the miscellaneous itemized deduction is no
longer available. For married filing jointly returns, the standard deduction has increased to
$24,000. For a driver who works all but two weeks in a year, per diem alone would have gotten
his Schedule A total close to the current $24,000 standard deduction, and any other deductions
would push it well over the $24,000.
In order to stay competitive, consult with your tax advisor about making your drivers’ pay
partially taxable wages and partially per diem reimbursement. The driver can more closely match
his/her earlier taxable income, and the company has less wages to pay FICA tax on. It’s a
win/win, one of the very rare situations where this is achievable when dealing with tax law!
Kelly Phillips, CPA is a partner with Bell & Company, P.A in North Little Rock, Arkansas. Bell
& Company specializes in providing accounting and consulting services to trucking companies across the country. Please email her at email@example.com or call at 501-753-9700.