S1 E44 What Truck Driver Per Diem Actually Is (And Why So Many Trucking Companies Get It Wrong)

Most trucking company owners have heard of per diem.

Most drivers have heard of per diem.

But very few people can clearly explain what it actually is.

In this episode of Driven for Success, Mike Ritzema breaks down truck driver per diem in plain English and clears up some of the biggest misconceptions in the trucking industry.

You'll learn:

•  What truck driver per diem actually is 
•  Why the IRS created it 
•  Why it's not a tax loophole 
•  How per diem affects drivers and trucking companies 
•  The biggest misunderstandings owners and drivers have about per diem 
•  Why so many companies either avoid it or implement it incorrectly 

If you've ever wondered whether per diem is worth offering, whether it's legal, or why drivers have such strong opinions about it, this episode provides the foundation you need before diving deeper into the topic.

This is the first episode in a special series focused on truck driver per diem and how it impacts trucking companies.

Driven for Success is the podcast for trucking company owners who want to build a better business, make better decisions, and grow without losing control.

Transcript

SPEAKER_00 0:02

Truck driver per diem is not a loophole. It's not a tax trick. And it's definitely not paying drivers tax-free. But that's how a lot of people talk about it. And because of that, a lot of trucking companies either avoid it completely or implement it incorrectly. Today, I want to start a discussion about what Prudiem actually is and why so many trucking companies are getting it wrong. Welcome to the Driven for Success podcast. This is a podcast for trucking company owners and executives who want to build better businesses, make better decisions, and keep drivers without losing control. I'm Mike Ritsema, owner of Superior Truck and Payroll Service, where our mission is simple to help trucking families. This podcast is one of the ways we fulfill that mission. And today we're kicking off a series on truck driver per diem. Because I've spent so many years talking to trucking companies about this topic, I want to continue to keep talking about it because I see the same misunderstandings over and over again. We had done this as a brief series early on in the podcast, and we were talking about some of the micro-level things, but we're going to get into deeper discussions about things in this series because there's still questions that people have. There's still questions that I get. Here's the thing that surprises me. Many trucking company owners have heard of Pritium. Most of them have. Most drivers have heard of Pritium. But very few can actually explain what it is. They know it might save some money. They know other companies are doing some version of it, but they don't really know why it exists. And that's where the problems start. Because when people don't understand something, they start making assumptions. They start filling in the gaps with their own perceived knowledge. Drivers think it's reducing their pay. Owners think it's some special kooky tax strategy. Care providers often explain it incorrectly. And then everyone gets confused. It's just one of those things. I've had conversations with hundreds of trucking company owners over the years about per diem. And even still, I get conversations of like, yeah, that sounds good, but we don't want to mess with it. And I'm just, I can't believe it. They think things like, oh, it's too complicated. Oh, I've got to keep every receipt from everything. Uh, the drivers won't understand it. They think that we're sticking it to them. I hear those things all the time. So and I think the biggest gap here is just knowledge. It's everybody's heard of it, but nobody can really explain it. So let's talk about what Per Diem actually is. We're going to start with the basics. Truck drivers, well, and other people, you know, when they're on the road for work, they spend money on meals and incidentals, things like a toothbrush for when you think incidentals, and things like personal care products while they're away from home. And the IRS knows that. But instead of going through the burden of making people, drivers in our conversation, keep every restaurant receipt and every receipt from the pharmacy where they had to go get something. The IRS decided to create a daily allowance. And that's per diem. That's it. It's an allowance for travel-related meal and incidental expenses. The important thing is the IRS allows qualifying drivers to receive part of their compensation as reimbursement for those travel expenses. And reimbursements are treated very differently than wages. And that's the foundation. That's where all of the other financial implications happen. Everything else comes later. Per diem isn't a tax trick, it's the IRS recognizing that drivers spend money for meals and incidentals while they're on the road. And they created it because the burden of keeping all the receipts was just too much. And the IRS wasn't going to go review them anyway. They don't need to see every truck stop receipt or every receipt because you needed lotion because your hands were dry. I'm just making up an example. But you get the idea. So they made a per diem allowance. And so where it's different for trucking is that for other people, it depends on what city you're in. If you're in Los Angeles, you will probably get a higher per diem rate than what you'll get in the middle of Iowa. The cost of living in the middle of Iowa, hopefully, probably is lower. And so that's where the difference is for trucking, is that for trucking, they said, okay, they have special rules for the transportation industry. I will put the links to these IRS pronouncements in the show notes on our website at truckingpayroll.com so you can find them. But they said, look, for special rules for the transportation industry, for drivers that are in multiple meals and all markets, they just use right now it's $80 a day. But that's the that's the main thing. Everything else comes after this. So other industries do have pre diem. For example, if you had a a worker that had to go do a job in Austin, Texas, they get Austin, Texas's pre dum rate. It wouldn't be maybe $80. I'm not exactly sure what theirs is. Probably higher, could be lower. It just depends where you are. The IRS has a whole list of markets and how much per diem you get for all of those. So this is where people start to get confused and a little lost and unsure of their footing. A lot of people think per diem is extra money. It's not. Most trucking companies are not increasing their driver compensation when they institute a plan to play pay per diem. They're reclassifying part of that compensation. And that's the big difference. The driver still earns the same gross compensation. Now part of it is wages and part of it is reimbursement. So if they were getting 50 cents a mile for 2,500 miles before, they were getting $1,250 in wage. Now they're getting $850 in wage and $400 in per diem if they were out five nights. So the compensation is still the same to the driver. But the driver, because the reimbursements aren't subject to tax the way that wages are, the driver takes home more net pay. That's good for the driver. Usually it's about $100, a little less, depending on what state or city you're in. But the company saves money too, because the company doesn't pay payroll tax on that reimbursement, and they don't pay workers' comp insurance generally on that reimbursement. So the driver gets an extra, I'm going to call it $100 a week. It depends on how much they earn, and there's other variables in there. And the employer saves about $50 a week in payroll tax and workers' compensation premium.

unknown 7:16

Yep.

SPEAKER_00 7:17

Predium doesn't create money in and of itself. It changes how part of the money is classified. So the terminology is really important here because the gross, there's gross pay and there's actual taxable what's taxable wage. And we want to make sure we get all the terminology right here. Their gross pay would drop, their taxable income would drop, their wage would drop, but their compensation would not drop. So it would stay at the $1250 in my example. Their net pay would go from something like $900 to close to $1,000 because that money comes off their highest tax rate for federal income tax. And it may for your state if the state that they're that your employees in or that where your company is has a progressive tax structure. So that the drives where the driver gets more money and the Social Security and Medicare tax that they don't pay. And the company saves money by not paying the Social Security tax and Medicare tax. For my purposes, I don't even count unemployment tax savings because you're most states are going to max out the wage anyway. So it doesn't really affect that. But they say that reimbursement for pre-deem is also not generally subject to workers' comp insurance. And so that's that's where the magic is for the trucking company. But the money doesn't magically appear. We're just having some lower expenses for the trucking company and lower tax for the driver. Basically, the driver wins, the company wins, the work comp insurance people lose, and the IRS lose. So, you know, just be mindful. That's the magic of it all. The biggest mistake that I see, though, in company, oh yeah, I want to do this. I want to start Predium because I want that savings. I want my drivers to have that savings, is they do it without understanding it. Maybe another trucking company told them to do it. Maybe a driver asked for it. Maybe they saw one of my videos. Maybe they saw somebody else's video. There's other people that do this stuff, like that are accountants or other people. So, but nobody explains the rules. They do these things, but they don't know why and they don't know how. And then years later, they're surprised when they have questions about Social Security wages or retirement contributions or things like that, because nobody explained the trade-offs. Pre diem is a tool and it's a powerful tool. Good tools require understanding. The problem isn't Pradeam, the problem is using PreDiem without understanding it. You know, people will say, oh yeah, we just did it because someone told us to. We did it, and it's all upside. Well, it's mostly upside, but it's not all upside. And I think it's important to explain to people where the downsides are. For example, and we'll talk about this in future episodes, but the driver's social security payout becomes less. And there's ways to deal with it. And again, tease up a future episode here and tell you to wait for that. We'll definitely talk about it. But people are just doing it because they told someone told them to do it, or they saw a video where someone told them to do it, but they don't understand why. And I think that's really the important thing. So that's the people that do it wrong. Then there's the other side of it, the people that are so scared of doing it wrong that they don't do it at all. Usually because someone told them it was risky, or it was complicated, or triggers an audit. And I'm not sure about any of those things being true. And besides that, it's usually not the issue. The issue is whether it's being administered correctly. The IRS does have rules. Drivers have to qualify. There does have to be some documentation, and the program has to be structured correctly. But those things are not mountains to climb. If you're following the rules, you're simply using a provision that has existed for a very long time in the tax code. Briefly about the rules, the IRS rules are the driver must be subject to hours of service limitations and multiple meals, and they must be in multiple meals in incidental markets on their round trip. And so every driver is subject to hours of service limitation, yes. Even if they don't have to do an ELD or do a log, if they stay in the 150-mile radius, they're still subject to hours of service regulations. So that one's pretty automatic. And the other one, multiple meals in incidental markets. Yeah, you're basically, if you're if you're 50 miles out of town, you're generally in a multiple meal in an incidental market. They should be out overnight. That's all better. That's a little bit of a gray area, but that's it really that's what we recommend if best if they're out overnight. And the documentation that has to exist, you have to prove they were gone. Bills of lading do that. You don't need the logs. You know, logs expire after six months back in the old paper days, right? You always threw out the logs from six months ago. That's not that's not what we're looking for. We're looking for a bill of lighting that says they picked up in Chicago and they delivered in Dallas. That should work just fine. So getting PreDM wrong is a problem. Using Pre diem is not. You know, there's a big difference between complying with something and avoiding it completely because you're scared about compliance. Uh, the compliance is not that complicated. Go get the expert opinion. It's all over our website for free and at your leisure at truckingpayrol.com. We have pre dum pages, we have pre-diem articles, there's all kinds of information there, and you can verify it with other people. We've got links to the IRS, we've got things like that. It's not just me telling you something, it's verifiable. And so, but what happens is if you get bad information or you're hearing horror stories of, oh, we did pre diem and it didn't go well for some reason. And the reason could be a lot of things, but mostly it's the driver didn't want to do it. But half of the result of that is they end up leave the trucking company leaves money on the table. And I don't know about your trucking company, but I don't know a lot of trucking companies that are willing to leave $2,500 a year per driver on the table. If you have 40 trucks, that can very easily be $100,000 in real savings for you. And that's too much money. You can't not take advantage of that. You just can't, you can't that kind of money on the table. So what should you really care about as an owner? The biggest question isn't whether Predium exists, because it does. The question is whether you understand how it affects your business. How does it affect drivers? Quick spoiler answer. Gives them more pay, helps you with driver retention, make sure it's in your ad when you're looking for drivers. How does it affect payroll taxes? It lowers them. How does it affect workers' compensation? Pretty much every time it lowers them. How does it affect recruiting and retention? We just talked about that. Put it in your recruiting things, it helps you retain drivers, all those things. It's all upside for you at this point. These are the questions that matter. Because pre-DEM isn't just a tax topic, it's an operations topic, it's a payroll topic, it's a driver experience and retention topic. The best pre-DEM program isn't the one that saves the most money, it's the one that everyone understands. Because if you do this right, you're gonna increase your driver trust. You're gonna be able to tell the driver, hey, we do this pre-DEM program. This is how it works, this is how it's gonna benefit you. You're gonna have clarity with your payroll between the payroll service, between the payroll service and you and the driver, which that just builds driver trust, also. Clarity always builds trust. And it also gives you, you know, it saves you money. It saves the driver money, it gives the driver more resources. Over the next few weeks, we're going to go deeper into all of this. We're gonna talk about how Per Diem actually saves you money. I brushed down it here, but I'm gonna really deep dive it more in the future. You know, talk about the qualifying of the driver and where things can go wrong with that. We're gonna talk about the mistakes that create the problems that you may encounter. We're gonna talk about the effects on workers' compensation, and we're gonna talk about the effects on payroll tax. And really, we're gonna talk a lot about the proper rollout, the way you explain it to your driver, and what exact what objections they're going to have or could have, and how you handle them. And we're gonna talk about what to do with that driver who just refuses to be a part of it. I don't care what you say. I am not, I do not want to work at a place that has pre-deum. If you have enough drivers, you're gonna run into that driver. And we want to help you be able to navigate that situation. Because if you do it wrong, you lose the driver. You know, if because if you're gonna use pre diem, you should understand it completely. For today, I want you to remember one thing. Predeum isn't magic, it's not a loophole, and it's not something to be afraid of. It's simply a tax provision designed for people who spend time away from home for work. Most pre diem problems don't come from the IRS, they come from people not understanding how pre diem works. Thanks for joining me for this episode of Driven for Success. Until next time, keep building a better trekking company.