Truck Driver Per Diem at Tax Time: Why Your Tax Refund May Be Smaller – Episode 51

So it’s tax time.

And a driver calls into the payroll person at the trucking company and says, I think my W-2 is wrong.

Or my refund seems smaller this year.

Or did somebody mess something up?

If you offer per diem, and especially if you just started in the past year, you might get that phone call.

Well, the good news is, most of the time, nothing is wrong.

Today I’m going to explain exactly what changes at tax time and why understanding ahead of time can save everyone a lot of stress.

Welcome to the Driven for Success Podcast.

This is the podcast for trucking company owners who want to build better businesses, make their better decisions, and keep more drivers without losing control.

I’m Mike Ritzema, your host and owner of Superior Trucking Payroll Service, where our mission is simple to help trucking families.

This podcast is one of the ways we fulfill that mission.

Today’s episode is all about tax season, even though we’re releasing it in the summer.

Every January, drivers get their W-2s and open them up.

Some are happy, some are confused, some think payroll made a mistake.

Most of these questions can be avoided if we simply explain what per diem does before tax season arrives.

Let’s talk about how this can happen.

We’ve got two drivers.

They do the exact same routes all year, the exact same pay, right?

Exact same everything.

One of them participates in per diem, the other one chooses not to.

At first glance, you might think they should have identical W-2s, but they won’t.

The driver using per diem will have lower taxable wage, which would be box one of the W-2.

And that means also because of that, they’ll have less in box two, which is federal income tax withheld.

That’s how much money they paid in federal income tax during the year.

They’ll also have less Social Security and less Medicare.

And because less federal income tax was withheld during the year, it’s possible they’re going to get a smaller refund.

And that surprises people because they assume a smaller refund means something went wrong, but it usually doesn’t.

As a reminder, your refund isn’t what you made, it’s what you overpaid the IRS.

Some people celebrate refunds, and that’s great.

I’m glad you can celebrate anything.

But that’s not really what you’re doing with this.

And refunds aren’t free money.

It’s just you overpaid during the year.

It would be similar to if you paid an extra $5 every time you went to buy lunch, and at the end of the year, they gave you all the money back.

It’s not really income.

It’s not free money.

It’s just money you could have had last year.

So and I think a lot of people misunderstand this, and I wish they didn’t.

A tax refund isn’t any bonus, it’s your own money coming back to you.

So again, using the lunch example, if I overpaid for my lunch $20 every week, at the end of the year, I get a refund of $1,000.

Would I celebrate, like, ooh, now I’ve got this money?

Probably not.

I’d ask the restaurant why they charge me, oh, overcharge me all year $20.

The IRS works the same way.

A large refund often means too much tax is withheld.

Per diem reduces taxable wages.

That usually means less withholding, and you’re also not withholding from the highest brackets because of the way the tax, we have what’s called a progressive tax structure, which means the first little bit of income you pay less on, none, quite honestly.

And then you might pay 10% on the next bit of it and 12% on the next bit of it, and up to into the 20s at the end.

So when your wage is a little smaller, the 20% part is where they’re not taking the tax money from.

In economics, they’ll call it talking about marginal revenue and things like that.

And that’s really what it is.

But it’s not an exact percentage.

So if you if you if you looked at those two W-2s, the percentage of federal income tax withheld from their from their gross pay, for the person who doesn’t have per diem, it’s going to be a higher percent and more money than it is from the lower one.

A big refund doesn’t mean you won.

It means you loan the government money for free.

I have some clients that it’s funny, I’m thinking of particular husband and wife, and when they get a refund, the wife is very happy.

She’s like, yay, we have X amount of dollars, right?

And the husband’s like, man, we meant we lent the government money for free.

And he wants to owe.

And because he’s like, if I owe, then I they lent me money for free.

So yeah, it happens.

Uh the best plan for all of this really is just better planning, getting out in front of it.

That that’s really the way to fix all those things for the driver.

And sometimes the driver’s going to owe money in tax and they’ve never owed before.

There’s always somebody who owes for the first time.

That doesn’t mean that payroll did anything wrong or that the W-2 is incorrect.

Per diem reduced taxable wages, so less taxes were withheld, which again is at that higher marginal rate, and so it becomes more of an impact.

They also might have non or they might have income that is not from that W-2.

They might have a spouse that works, they might have investment income, they might have a Doordash or something like that, a side hustle.

All these things go on the final tax return.

Payroll only knows about payroll.

The tax return knows everything.

Because payroll calculates paychecks based on the information they have.

Your tax return is the calculation for your life in that year.

You could have, there are things like dependents and dependent tax credits, and some of those dependent tax credits fall off.

When your child reaches 16, it becomes a lot smaller.

So if they have a kid that was 15 and now 16, their refund is going to be a lot less.

And the thing they’re going to look at is you started a pre-im program for us, and now my refund is lower.

That’s called correlation.

That is not causation as the reduced reduction in child tax credit because the child aged out of it.

So that just something to keep in mind.

That’s the one of the best examples of correlation causation that I can think of.

But also, they could have their spouse could have had an increase in income or decrease in income.

You could have other tax credits, for example, often there’s a tax credit for making your house more energy efficient.

Maybe you got that last year.

Tuition credit for college, things like that.

All those things that affect the tax return that have nothing to do with your paycheck.

And so keep that in mind when the driver comes to you.

So you’re going to get questions like, well, my social security wages are lower or my taxable income is lower.

Well, that’s exactly what Per diem is designed to do.

The driver’s gross competition didn’t suddenly disappear the way that we designed this.

Some of it became a qualified reimbursement instead of taxable wages, which means they got all the money instead of paying tax on it.

That’s why the W-2 changes.

And that’s why payroll records and pay stubs remain important.

If your W-2 looks different because of Per diem, that’s a sign that it worked.

You also probably noticed your paycheck got bigger.

Per diem is a qualified reimbursement.

It is absolutely illegal.

We talked about it in the previous episode, the revenue procedures and all those things that you can cite.

I think it’s 2024-68.

Gives you the number.

Look up IRS Revproc 2024-68 and you’ll see it.

And then 2019-48 goes into more detail about how who qualifies and who doesn’t.

But there’s a difference between gross compensation and taxable wages.

And so we’re trying to reduce the taxable wages without reducing the gross compensation.

Another example of this is company paid health insurance.

If your company provides you with health insurance, it is really part of your compensation.

It’s costing the company money to buy your insurance, unless you’re paying for all of it.

But it’s not taxable wage.

It’s really the same thing.

So you’re a trucking company and you’re wondering how I should handle this.

Educate the drivers when they enroll.

Explain to them your taxable wage is going to be less, your withholding is going to be less.

It may impact your refund in a negative way.

That doesn’t mean something’s wrong.

And that’s okay.

So if you set the expectations early, they will handle the surprise much better than getting the surprise later.

The surprise later at tax time is usually bad.

Confusion at tax time usually starts with a conversation that never happened.

Talk about it in orientation.

Here’s what we do with per diem.

Here’s how we pay it.

This is how it may impact you.

And this is really important too.

Unless you’re a tax preparer yourself, do not give them tax advice.

Do not, do not, do not.

Every HR person, every finance person will tell you that.

Do not give tax advice, even with a W-4.

Don’t give tax advice on how to fill it out.

The W-4 got a lot more complicated in about six or seven years ago.

It used to be just single and married and number of exemptions, and that was pretty much it for almost everybody.

Now it’s a lot more complicated.

They actually went out of their way to make it more accurate, but the accuracy made it into a book instead of a page.

It’s the multiple page form with the instructions now.

They account for things like your spouse having a job, they account for you having a second job, they might account for trying to how many child tax credits you’re going to get, things like that.

So it really makes it more accurate if you fill it out correctly.

But a lot of people don’t fill it out correctly because it’s a lot more complicated.

And that’s a problem.

So if I would, if I were in a trucking company and a new driver or even a current, a old time driver came to me with a question about their W-4 or a question about how it’s going to affect their tax situation, I would tell, I would send them back to their tax advisor.

You need to talk to your tax advisor about this.

Here’s what we do and how we do it.

Give this to them and they’ll help you make an informed decision.

You never want to give tax advice.

It’s putting your foot in the bear trap.

It’s never going to work.

By the way, on our YouTube channel, we filmed a webinar right when that new webinar, when that new W-4 came out in I think 2020.

It’s still sitting on our uh just go to Trucking Payroll channel on YouTube and look for it.

It’s a 45-minute webinar.

I’d show them that because I’m giving generic advice in that one.

I’m not I’m not their tax advisor.

So I can at least help them get in the right direction on this.

But show them examples if you want.

Um remind them annually what’s going on.

Uh have it in the orientation, have it in the enrollment paperwork.

Uh, make them some some companies, and this isn’t a bad idea, some companies will instead of making drivers opt out of per diem, which I always tell you, I’ve said it in a bunch of podcasts, always let the drivers opt out if they want.

Even if you’re sure they’re doing it wrong, it’s not worth losing a driver over.

But you could make them opt in instead, or make them, or have a page where they opt in or opt out and explain it all right there.

At least you can say to them, look, we presented you with this data and you chose to ignore it.

Now you don’t want to win a fight on this.

You don’t you don’t want it to be a fight at all.

But at least you can have gone through it with them.

And you could they’ll be like, oh, I remember that now.

Because a lot of times, too, it might be the driver’s spouse who’s like, Well, we I was counting on that money for this, or I was counting on that money for that, and now it’s not there.

Count on it to pay Christmas credit card bills, whatever, spring break.

Make it something fun spring break.

So all those things, all these conversations are better to have beforehand.

It makes it a much smaller deal, which we all know, but let’s let’s try and apply that.

Per diem works exactly the way Congress intended and the IRS.

It reduces taxable wage for those who qualify.

That creates tax savings, but it also changes the tax season for them.

It’s not good or bad, it’s just different.

And it’s the result of saving that money and getting that extra hundred dollars in their paycheck every week, all year.

The companies that have the fewest January phone calls are the companies that were prepared in July and prepared their drivers in July.

Don’t wait to educate your drivers until the W-2 arrives.

Educate them when they choose per diem.

If you’re a trucking company thinking about offering per diem, or you’re already offering it and want to make sure you’re handling it correctly, we’d love to help.

At Superior Trucking Payroll Service, we’ve helped trucking companies all over the country implement compliant per diem programs and make sure drivers understand exactly how it affects their paychecks and their taxes.

If you found today’s episode helpful, I’d appreciate it if you’d subscribe to the podcast, leave us a review, and share this episode with another trucking company owner.

It really helps us reach more people in the trucking industry.

And if you have questions about payroll or per diem, we’ve done a we’re doing a whole per diem series.

Watch the other episodes of the podcast and visit us at Superior Trucking Payroll Service, truckingpayroll.com.

We’re happy to help.

We have conversations with people all the time that are not clients and may never be clients.

So it’s not, we’re trying not trying to like run a bill up like an attorney on you.

We we want to help you.

That’s our mission.

So until then, keep on trucking, and we’ll see you next week.