Rev. Rul. 59-371

Advice has been requested relative to the treatment, solely for purposes of withholding income tax under section 3402 of the Internal Revenue Code of 1954, of amounts paid to and received by certain employees as daily transportation allowances and per diem allowances to cover their expenses for meals, lodging, etc., while working on construction and other projects.

Section 31.3401(a)-1(b)(2) of the Employment Tax Regulations, in defining the term "wages" for purposes of the Collection of Income Tax at Source on Wages (chapter 24, subtitle C, Internal Revenue Code of 1954), provides as follows:

Traveling and other expenses.--Amounts paid specifically--either as advances or reimbursements--for traveling or other bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred in the business of the employer are not wages and are not subject to withholding. Traveling and other reimbursed expenses must be identified either by making a separate payment or by specifically indicating the separate amounts where both wages and expense allowances are combined in a single payment.

Generally, an employer will take the point of view that reasonable allowances paid to cover his employees' expenses for daily transportation or for meals and lodging while employed at a project remote from the available labor supply represent payments made by the employer to reimburse his employees for expenses incurred by them in connection with the employer's business. Thus, such payments have been treated by the employers concerned as reimbursements of expenses incurred by the employees in the business of the employer and not as additional wages.

Revenue Ruling 190, C.B. 1953-2, 303, holds that reasonable transportation allowances paid by a company to its employees while working for a strictly temporary period on a construction project located at a distance from their principal or regular place of employment do not constitute "wages" for purposes of the taxes imposed by the Federal employment tax statutes, including the withholding of income tax. The rationale of that Revenue Ruling has also been considered applicable to the per diem allowances paid by a company to its employees while working on a temporary job at a more remote location from which the employees are unable to return to their principal or regular place of employment at the end of each workday.

Revenue Ruling 190, supra, is applicable only to situations where employees are working for a strictly temporary period (as distinguished from an indefinite period) on projects located at a distance from the employee's principal or regular place of employment. In the application of this ruling, the Internal Revenue Service has held that such allowances (when reasonable in amount and when clearly segregated from the payment of remuneration for employment) do not constitute "wages" for Federal employment tax purposes and for the purposes of withholding of income tax, in all cases where the employer, in good faith, considers the employee's assignment to the particular project to be temporary in nature.

Considerable confusion appears to exist, however, among the employee-recipients of such allowances whether, under particular factual situations, their actual expenses for daily transportation to and from projects, or for their meals and lodging while working on such projects, constitute deductible business expenses under section 162(a) of the Code. Furthermore, the existing position of the Service in not requiring the employer to withhold income tax from these allowances has resulted in substantial hardship in those cases where, upon subsequent audit of the employees' income tax returns and examination of their individual factual situations, it has been found that the actual expenses incurred by recipients of such allowances are not deductible business expenses. This is especially true where large income tax deficiencies result.

To alleviate such hardship and to insure that the amount of income tax withheld will more nearly approximate the correct amount of Federal income tax due, the Service has concluded that (1) when an employee has worked for a substantially continuous period of one year in any particular project area; or (2) if, at the time an employee is hired, it is contemplated that his assignment or series of assignments in any particular project area for the employer may continue for more than one year; or (3) if it becomes apparent at any time that an employee's services may reasonably be expected to continue for more than one year in any particular project area, such employee will no longer be considered, for purposes of withholding income tax under section 3402 of the Code, to be employed for a temporary (as distinguished from an indefinite) period. If and when any one of the above-stated conditions has been met, any allowances or reimbursements paid to an employee by his employer to cover the cost of the employee's daily transportation expenses to and from the job site, or to cover the cost of his meals and lodging while working there, will thereafter be subject to the withholding of income tax as additional compensation.

The position of the Service as set forth herein is designed to permit employers concerned to rely upon clearly established administrative rules in determining whether amounts paid as allowances or reimbursements for expenses are subject to the withholding of income tax. These rules have been devised to incorporate such factors indicative of Federal income tax liability on the part of the employee-recipient as may ordinary be expected to fall within the employer's knowledge. It also places a limit upon the period of times which may be regarded as "temporary" in determining the applicability of the withholding of income tax to such amounts. This time limitation is predicated upon the reasonable assumption that an individual engaged to perform, or after performing, services in a particular project area for one year is not employed for a temporary period and, therefore, the expenses covered by the allowances received will not be deductible under section 162(a) of the Code.

Whether or not an employer withholds income tax from such allowances is not determinative of the question whether the expenses to which the allowances are related do or do not constitute deductible expenses of the employee under section 162(a) of the Code. Despite the fact that income tax has been withheld from such allowances, each individual employee may submit evidence to the District Director of Internal Revenue with whom he files his Federal income tax returns to establish that he was employed for a temporary period and that the expenses covered by such allowances did, in fact, constitute deductible expenses under section 162(a) of the Code. Proper adjustment for the correct amount of tax due will then be made.

While it is realized that the correct result may not be accomplished in all cases, a withholding of the approximate amount of tax will result in most cases so that employees will not be faced at a later date with the payment of large income tax deficiencies.

The rules adopted herein are to be applied solely with respect to the treatment, for purposes of the withholding of income tax under section 3402 of the Code, of amounts paid to and received by employees as daily transportation allowances and per diem allowances to cover their expenses for meals and lodging, etc., while working on construction and other projects. These rules are not intended for use in determining an employee's "wages" subject to the taxes imposed by the Federal Insurance Contributions Act and the Federal Unemployment Tax Act (chapters 21 and 23, respectively, subtitle C, of the Code).

Under the authority of section 7805(b) of the Code, this Revenue Ruling will be applied only to payments made on or after January 1, 1960.