Per Diem Pay Again - Actual Example From Michael's 2021 Pay/Taxes

Last year I wrote a post trying to explain the merits of per diem pay. Some drivers have said per diem pay is of no benefit to drivers to use it. I will show an actual example of the benefits of taking per diem pay.

Background: I am not a truck driver but my son Michael has been driving a little over 19 months with the past 11 months of that at Marten which pays 17 CPM of pay as per diem. I have owned my business for almost 30 years and have worked with my CPAs for my own needs as well as family estate matters and in a prior career in finance worked with thousands of tax returns so I believe it’s an area I understand pretty well. I am not offering advice, just providing information that I hope is useful to some drivers.

In a previous thread another member said that per diem pay is still included on a W-2 and is taxed. That is not what I have seen on Michael’s W-2 and I have never seen evidence to the contrary. Michael has just filed his 2021 income tax returns. The per diem pay he received from Marten was not included in box 1 of the W-2 Wages, tips, other compensation nor in box 3 Social security wages that he received from Marten for the 9 months he drove there (he previously worked at C.R. England which did not offer per diem pay). The per diem compensation does not show up anywhere on the Copy B to be filed with the Federal Tax Return. Per diem pay is shown in box 14 for Copy 2 to be filed with the State, City, or Local Income Tax return but this does not get reported anywhere as taxable income.

In 9 months at Marten, Michael earned $56,534. Of that, $12,527 was paid as per diem. Among other things, he had deductions of $2,208 for health insurance and HSA contributions. Subtracting these two items results in the $41,798 shown for Social security wages in box 3 of the W-2. Subtracting 401k contributions of $8,582 comes up with the amount shown in Box 1 of Wages, tips, other compensation. There are zero taxes of any kind paid on the per diem pay (but 401k contributions are taxed for Social Security and Medicare). By receiving $12,527 of his compensation from Marten as per diem Michael saved $1,503 in Federal income taxes (12% bracket) and $958 in Social Security and Medicare taxes. He also saved $501 in California income taxes (4% bracket) and $150 in state disability insurance taxes. In total, he saved in $3,112 in taxes (essentially getting 4 CPM more in his pockets). He will save even more in 2022 working for Marten for 12 months and getting a higher CPM rate than when he started.

While Marten deducts 17 CPM from Michael’s ordinary pay and pays 17 CPM as per diem pay, some companies don’t pay the full amount of the deduction. This is most likely because they are only able to deduct 80% of the per diem as a business expense according to this article written by a CPA/advisor. It is worth reading “other considerations” mentioned at https://www.ksmcpa.com/insights/how-a-per-diem-program-can-help-drivers-and-carriers-save-in-taxes/

The only small downside for Michael may be lower Social Security benefits in 50 years or so and in slightly lower vacation pay. He will be further ahead by investing his tax savings. Besides his 401k account, he is also contributing to a Roth IRA and a non-qualified investment account with goals to save enough money to pay cash for a house one day – lofty goal but a good one!

That was a question I have. Just how much can it affect your social security?

That is difficult to answer as it largely depends on what your past earnings have been, what your current earnings are, and what your future earnings will be.

The formulas apply a different factor for each year of earnings history to account for wage inflation. Wages earned 20 years ago are given a heavier weighting than earnings for last year. For instance, when I last did a manual estimate for myself back in 2016 the factor for 2014 and 2015 was 1.00 with 1974 given a weighting of 5.79. If I understand my old notes correctly, benefits were based on the highest 35 years (after adjusted by the factors for each year). Then, to make it even more complicated, the lower wages are given a higher benefit rating than the higher wages. Specifically, for my benefit estimate made back in 2016 using the Social Security benefit estimator, I calculated my highest 35 years, applied the factors, totaled those up, and divided by 420 (420 months equals 35 years) to come up with an average monthly income. Of that amount, my benefits were 90% of the first $856, 32% of the next $4,301, and then 15% of the amount over that (there may have been other brackets that I did not fall into and don't have written down. But this shows pretty clearly that if you reduce your earnings by a small amount they have a smaller impact on your benefits over the long run (since benefits were only 15% of the average earnings above $4,301/month).

Most financial advisors would surely agree that you would be better off investing some of your higher earnings yourself than rely on the government giving you a greater benefit.

The Social Security Administration has online calculators at https://www.ssa.gov/benefits/calculators/ as well as programs that you can install on your computer.

I am turning 65 this year and planning to wait until turning age 70 before starting benefits as my family history has some long lifespans and I have other sources of retirement income that are much greater than my expected Social Security benefits. My wife and I have saved aggressively since we were married 39 years ago and our son is presently going at a faster pace than us. Hopefully, most of us can do well enough that we can rely on Social Security only as a safety net.

In this cached copy of a Schneider blog on the subject, they estimated that a driver's Social Security benefits would be reduced by $10/month for every year that they participated in per diem pay options.

Thank you, Harvey, your information was very helpful. Last week I had to make a decision about per diem and after flipping a coin, I took it. In my case it’s .11 out of .55 cpm. Based on your explanation I’m confident that I made the right decision.

Btw, every time I see a Marten truck out on the road, it makes me think of you and Michael.

Two questions Harvey...

Does Michael itemize deductions? I assume that answer is no.

The other question is do you or Michael know if Marten is charging an administrative fee for their drivers on per diem? The two companies I have worked with deduct 2 cents per mile from your CPM rate to pay for their administrative costs related to the per diem. That is effectively around 2,500 dollars less income in most scenarios. That is a wash for those of us who don't live in California.

If taxable income is a concern, wouldn't be better served increasing his 401k contribution?

Thanks for the Info. Me being 4 years ish from retirement and having been a previously high earner, it isn't likely to impact much on SS. I may rethink per diem.

Agree with your general advice to invest as much as you can. I did it early on. Makes for a brighter outlook later in life

The other question is do you or Michael know if Marten is charging an administrative fee for their drivers on per diem? The two companies I have worked with deduct 2 cents per mile from your CPM rate to pay for their administrative costs related to the per diem. That is effectively around 2,500 dollars less income in most scenarios. That is a wash for those of us who don't live in California.

Old School,

The four companies I have worked for since coming back on the road in 2014, have all taken out $0.09 CPM for per diem and none of them have charged any administrative fee at all. I've looked through the itemized withdrawals and there is no fee anywhere on my pay statement that is being taken out without knowing what it is for.

Laura

Michael does not itemize deductions. This has no impact on per diem pay since it is not include in Adjusted Gross Income and because company drivers cannot deduct travel expenses since the change in the federal tax code in 2017.

Marten does not charge any fees for per diem pay. I addressed this in my post. In most cases even drivers being charged a 2 CPM fee will benefit, but not as much. Michael's benefit in tax savings (primarily federal, Social Security, and Medicare) worked out to 4 CPM for 2021.

Two questions Harvey...

Does Michael itemize deductions? I assume that answer is no.

The other question is do you or Michael know if Marten is charging an administrative fee for their drivers on per diem? The two companies I have worked with deduct 2 cents per mile from your CPM rate to pay for their administrative costs related to the per diem. That is effectively around 2,500 dollars less income in most scenarios. That is a wash for those of us who don't live in California.

No. 401k contributions defer income tax obligations, not eliminate them.

Michael is already contributing over 25% to 401k and nearly maxed out in reaching annual contribution limits. I am actually considering advising Michael to reduce his 401k contributions and increasing his non-qualified savings/investments. My wife and I have been aggressive savers and have large 401k/IRA accounts and our required minimum distributions are projected to push us into even higher tax brackets than we've ever been in the past. Michael is presently in the 12% federal tax bracket and is likely going to be in higher tax bracket when he retires so saving and investing outside of 401k (which he already does) will likely yield him better results in the long run.

If taxable income is a concern, wouldn't be better served increasing his 401k contribution?