S1 E 46 The 3 Ways Trucking Companies Pay Per Diem (And Why Two Fall Short)

Most trucking companies know per diem can save money.

What many don't realize is there are three different ways to calculate it.

Some fleets use a cents-per-mile method. Others use a percentage of driver pay. The third method calculates per diem based on qualifying travel days.

In this episode, Mike Ritzema breaks down all three approaches, explains why companies use them, and discusses the advantages and disadvantages of each.

Topics include:

•  Per diem by the mile 
•  Per diem as a percentage of wages 
•  Per diem by the day 
•  Why software often drives the calculation method 
•  IRS compliance considerations 
•  How companies can leave savings on the table 
•  Why travel days matter 

If you're considering implementing per diem or reviewing your current program, this episode will help you understand the options and avoid common mistakes.

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.

Learn more at https://www.truckingpayroll.com

Transcript

SPEAKER_00 0:01

Most trucking companies think per diem is one thing done one way. It's not. I've seen companies calculate per diem by the mile, I've seen companies calculate it as a percentage of wages, and I've seen companies calculate it by the day. All three certainly exist, but only one of them follows the IRS framework the way it was intended. And today I'm going to explain why that matters. Welcome to the Driven for Success Podcast. This is the podcast for trucking company owners and executives who want to build a better business, make better decisions, and keep drivers without losing control. I'm Mike Ritsema, the owner of Superior Trucking Payroll Service, where our mission is simple to help trucking families. This podcast is one of the ways we deliver on that mission. And today we're going to continue our series on truck driver per diem. In the last episode, we talked about how much money you can save as a trucking company by paying per diem. If you haven't listened to it, it's very much worth a listen. It can change your company. Today, we're going to talk about something that most trucking company owners don't even realize exists. That there are three common ways companies calculate per diem. And the method you choose has a huge impact on savings, compliance, and driver understanding. When most owners hear about per diem, they immediately ask, how much money can I save? And that's a fair question. But before you can answer that question, you need to know how the plan is being calculated. Because not all pre diem plans are created equal. Some plans leave money on the table. Some plans create IRS concerns. And some plans do both. But the reality is that the IRS doesn't base per diem on miles. The IRS doesn't base per diem on wages. The IRS bases per diem on qualifying travel days. And that distinction matters. Because if you're using miles or wages to estimate days, then you're estimating. And estimates can create problems. Per diem isn't just a tax strategy, it's a compliance strategy. When people hear me say there are three ways for a company to pay per diem, they assume all three are equally good, but they're not. Two of them can create problems. One of them follows the IRS rules exactly the way they were intended. And that's important because per diem isn't about getting close, it's about getting it right. There are three ways to pay per diem. Only one of them maximizes the benefit and stays compliant with the IRS. So let's talk about these three ways. First, we're going to talk about per diem by the mile. It's like instead of paying a driver 55 cents a mile, you're paying him 45 cents a mile as wage and 10 cents a mile as per diem. Easy enough to understand that way. The drivers understand the miles. It's an easy methodology. Dispatch understands the miles, payroll understands. All these things are important for sure. But there's a problem. The IRS doesn't determine eligibility based on miles. The IRS determines eligibility based on days. It's completely reasonable that an IRS, or that a I'm sorry, that a driver might run 150 miles one day because they got detained at loading and unloading. And then the next day they might run 650 miles. Both days qualify for the exact same per diem amount. So how do you make the miles line up with the days? You really can't. Which means one of two things happens. Either the company sets the mileage amount conservatively because they don't want IRS problems, and they're leaving savings on the table, both for the company and the driver. Or the company gets aggressive, risks exceeding what the driver is actually eligible for to maximize the savings, but may have IRS issues. When you use miles, you're guessing at days. And whenever you're guessing, you're either leaving money on the table or creating a potential IRS problem. Let's talk about the second method. Second method is percentage of wage paid to the driver. So it's a pretty easy idea. You give a quarter or a 30% or a third or whatever of the wage, you just designate that as per diem. It sounds simple enough. And it's been fairly common over the years, but it has the exact same problem that mileage has. The IRS isn't concerned about how much the driver earned, they care about the number of days. So a driver can have a fantastic week because you just found that an amazing load. And they get a, they got up, they got a even paid revenue or paid percentage of revenue. And now the percentage of that percentage of revenue becomes per diem, and they'll be out of compliance. Or they have a terrible week. You're just backhauling out of the East Coast or something for some reason. And they earn less money, and then they get less per diem, and you're leaving savings on the table. Neither of these instances, the good week or the bad week for the driver, changes the number of qualifying days necessarily. So again, the calculation becomes an estimate. And estimates create one of the two outcomes: not enough per diem or too much per diem. And neither outcome is ideal. The IRS cares about days, not miles, not wages, days. If the IRS starts with days, your calculation should start with days too. Another challenge is transparency. Drivers often struggle to understand percentage-based calculations, and especially when it comes to their paycheck. And if they don't understand their paycheck, they'll usually assume something is wrong and it doesn't favor them. When a driver can't explain their paycheck, they stop trusting it and they stop trusting you. So let's talk about the third way. This is the one that actually follows the IRS framework. Day-based per diem. Per diem is Latin for per day. So that makes sense. It's the method we suggest here at Superior Trekking Payroll Service. We will accept them any other way that you want to do it because it's your problem, not ours. But we to maximize your savings and ensure IRS compliance with this, it's what we always recommend. Because it starts with the same thing the IRS starts with days. The IRS has a daily rate. They update it at the end of September usually, effective October 1st. Currently, that's $80 a day for qualified days. So instead of estimating or converting miles or creating percentages, we simply determine how many traveling days occurred and apply the rate. That's it. Let's say a driver qualifies for five days. Five times $80, $400, $400 a per diem. Done. Simple, clear, easy to explain, easy to verify from the bills. You don't have to verify it from the logs because you only keep logs for six months anyway. They're now auto-probably delete from your system from the ELD. So but the bills of lading shows that the load picked up in Chicago on June 19 and delivered in Dallas on June 21. Well, there's a couple of days, right? And then they circled back, reloaded on the 22nd, delivered on the 24th back to Chicago. You've start days from the beginning to the end, those are your days. So it's easy to defend, it's easy to verify. And most importantly, the driver gets the maximum amount of per diem they're entitled to receive, which means their paycheck is going to be as big as you can make it without giving them a raise. The company gets every dollar of savings they're entitled to receive as well on their work comp and on their payroll tax. And the records support all these calculations. The only way to maximize per diem and stay compliant is to track the days. This is one of the reasons I like day-based plans so much. Drivers can verify the days, owners can, payroll can. If the driver asks why they received a certain amount of per diem, you can just go back and look at the bills or look at the load in your TMS. There's no complicated formulas, there's no percentages to do, there's no how many miles did they give me credit for versus how many did I really run? For example, that I maybe you're give doing practical miles instead of hub miles. There's none of that. Just days. And clarity builds trust. The easiest pre-diem plan to defend is the one that everyone can verify. At your point, at this point, you might be thinking, does it really matter which method we use? And I think it does. Because if you're going to offer per diem, you should offer the full benefit of per diem. And if you're going to claim the tax advantages, you should be able to support that deduction. Too many companies settle for close enough. But close enough usually means they're either leaving savings on the table or creating unnecessary risk. And neither one helps the business. Good pre diem isn't about being creative, it's about being accurate. The more assumptions you eliminate, the stronger your plan becomes. Now you might be wondering about to yourself, why do companies not just everybody pay just by the days, like I'm talking about? I feel like I made it reasonably clear. Well, there's usually some reasons, and there are reasons I think you can get around. One of them is your TMS might not support day-based pre-dium. You might think, oh, we can't put pre diem in there, and we might do payroll through our TMS or might do something that gets a payroll file out. That's not a good reason to not do this. It's it's the companies that I see that pay pre dm per mile, almost always it comes out of their software. So you can one of the things you can do is either just tell it not to do pre diem there, and you can just get us or your payroll provider, however you do payroll. Just get them the number of days, and you'll be fine right there. And you'll maximize the pre diem savings for your driver and for the company. But the TMS being limited to that is not a good reason to pay by the mile. The percentage people, it's often similar, but it's the same, the same reasoning applies because the the percentage is gonna be up and down. The percentage is gonna be if you get a short load that pays really well, you're gonna be out of compliance with Pradeum. And let's be honest, the odds of getting caught on this by the IRS is not high. I'm not trying to make this doom and gloom. I just think it's one less thing to worry about. It's one less mental checklist on your on that you've got. Take one thing off the list. I'm anytime I can do that, I want to do it. So you have enough other things to worry about. Safety and hiring and all these other things, getting good rates. Let's not worry about if my per diem program is going to get me in trouble. So that's where we get to pay up by the day. Maximize it every single day. Because really, if you if you overpay per diem, if you right now it's $80 a day, and if your calculation, whether it's percentage or miles, gets to $100, the IRS will say that last $20 was income. And what they'll mean by that is you owe payroll tax on it, the driver owes payroll tax on it or income tax on it, which is going to be a mess for everybody. And then you get into all the penalties and things that the IRS will give people for doing something wrong, like a failure to pay penalty and a failure to file correctly penalty and all that nonsense. So just avoid it all. Pay it by the day. I'm telling you, it's the best way to go. And you can do it with any plan. Absolutely. In the next episode, we're going to tackle one of the biggest concerns owners have when they roll out a PRDM program. What happens if a driver says no? Because not every driver immediately embraces per diem. Some drivers worry about mortgages, some drivers worry about their social security check. Some worry about taxes and compliance. And some just don't trust you or trust anyone. We'll talk about all those concerns in the next episode. Until then, remember that payroll isn't just about paying people, it's about building trust. And trust starts with clarity. If the IRS starts with days, your pre diem day plan should start with days too. Confusion creates conflict. Clarity builds trust. We'll see you next week.