Fleets, drivers using automated per diem pay to shelter income

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Updated Aug 25, 2021
Per diem programs can put more money in drivers' pockets and save fleets money in payroll taxes.
Per diem programs can put more money in drivers' pockets and save fleets money in payroll taxes.

In Feb. 2016, David Broyles was settling into a new role as Averitt Express' director of driver services when he attended an Omnitracs user conference in Nashville. He was intrigued by a service he discussed with an exhibitor, Atlantic HR Solutions, for managing per diem driver pay.

When Broyles mentioned the benefits of per diem pay to Averitt’s chief financial officer, the response was “we’re not getting into that mess. That will not help anybody,” he said.

Shortly after this exchange, Averitt got a new CFO. Boyles again discussed per diem pay and set up a meeting between Atlantic HR and Averitt’s executive team. After evaluating the data with accountants and lawyers, the new CFO was onboard.

Cookeville, Tenn.-based Averitt Express (CCJ Top 250, No. 28) has been paying drivers a daily per diem rate since January 1, 2017.

“It made such a difference in pay,” Broyles said. “Luckily we did it when we did.”

The trucking industry was going through a downturn in 2017. Averitt was unable to do a pay increase for drivers, but made it possible for them to net more money. Broyles credits Averitt's per diem pay for a four percent reduction in driver turnover in 2017. Today, virtually all if its drivers are in the program..

“Per diem made sense for everybody across the board,” he said.

Averitt’s driver turnover rate has been trending down every year since 2017. Last year it ended at 39% in the over-the-road division. This year, amid a severe driver shortage, its annualized turnover rate is at 47%, he noted.

The tax advantages

A lot of fleets offer per diem programs because drivers are asking for it, but owners and executives may not understand the tax advantages, said Kehl Carter, chief executive and founder of Atlantic HR Solutions.

The Tax Cuts and Jobs Act, signed into law by President Trump in Dec. 2017, increased the standard IRS tax deduction for individuals but removed the ability for company employees to deduct travel expenses. The change makes it easier for more people to file a short form for federal taxes, Carter said.

Owner-operators do not get the same tax advantages as company drivers, but they can deduct per diem by filing a Schedule C with their federal taxes.

Company-sponsored per diem programs were not impacted by the new tax law. Motor carriers are still able to allocate $66 per day, which amounts to between $300 and $400 of income each week shifting to the tax-free column.

Using per diem to shelter income saves about 30% in payroll taxes on the reallocated earnings. This increases net pay for an average over-the-road driver by about $100 a week, Carter explains. Over a typical year of 50 workweeks, drivers will see an increase in their take-home pay of approximately $5,000.

Without a per diem program, motor carriers would need to increase driver pay by more than $8,500 annually to get the same $5,000 in drivers' pockets, he said. Drivers who use company per diem programs can still use the standard deduction and file a short-form federal tax return.

Since per diem reduces drivers’ payroll tax withholdings it also saves motor carriers significant money by reducing their matching amount of  state and federal payroll taxes. By doing so, carriers in most states also pay less in workers comp premiums, Carter said.

For drivers who are concerned that paying lower taxes will have a negative impact on future Social Security benefits, Carter said the math shows they have no reason to worry.   

To calculate retirement benefits, the Social Security administration uses a taxpayer’s highest years of earnings for a 35-year period. The income is averaged and tied to a monthly index. The first $800 of income from the index is paid at 90%. The second tier of income, from $800 to $5,000, is paid at a 32% rate.

To illustrate how per diem would impact the Social Security calculation for drivers, Kehl uses an example of $1,900 a week in taxable income. Whether or not a driver uses per diem, his Social Security benefits will be no different for the first $800. Per diem pay would only impact his benefits for income between $800 and $1,900, which is paid at the lower 32% rate.

The math shows that drivers are better off with an extra $100 a week in take-home pay and saving a portion of it, such as $20, in an IRA. When a driver retires at 67 years old, for example, the extra take-home pay he received would far exceed a minimal reduction in Social Security benefits, he explains.  

“It is much better to take $100 a week home to your family to decrease debt or put into a third-party investment tool,” he said.

Payroll automation

Data collected by electronic logging devices (ELDs) can be used to verify when and where drivers qualify for per diem pay.

About eight years ago, Omnitracs developed a program called Per Diem Manager that integrates with Atlantic HR Solutions software to automate per diem calculations and the substantiation process required by the IRS for record keeping.

Fleets with per diem programs can shelter $66 of a driver's income from payroll taxes each day that a driver spends away from home.Fleets with per diem programs can shelter $66 of a driver's income from payroll taxes each day that a driver spends away from home.Motor carriers and drivers do not need receipts for meals. What they do need is a record of the date, time and location to show each day where they could or should have stopped for a meal on the road, Carter said.

Omnitracs’ Per Diem Manager captures all of this information for substantiation. The record includes both the distance a driver was from home and whether or not they spent a night away.

Atlantic HR also integrates with other ELD providers and with back-office software systems to automatically move the appropriate amount of income, based on the daily per diem rate of $66, from taxable to non-taxable columns.

The Omnitracs and Atlantic HR program has a small charge, per driver, that is applied only when drivers have per diem pay in a given week. Most carriers cover this cost for their drivers, Carter said.

Atlantic HR has a call center to answer per diem questions from drivers. The company does this so that payroll departments of motor carriers do not have to be tax professionals, he said.