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I am working for IT consulting organization in USA. My current employer pays salary on hourly basis and total salary is taxable.

I have got another offer from another Consulting Organization. New employer places their employees across client locations based on their corp-corp contracts. And based on those contracts I have to travel to those client locations and work at client location for the duration of the contract. Those kind of contracts start from 3 months to 1.5 years. Some times contracts get keep on getting renewing to years.

Hence new employer pays a part of the salary as per diem compensation along with regular salary and says that per-diem compensation is non-taxable. The regular hourly salary is less than what I am getting right now. But if I combine regular and per diem component then my earnings becomes more than the current earnings with my current employer. New employer also provides a feasibility to put entire salary as regular salary and which becomes taxable. But at the end of the day my earnings after tax would be same as what I am earning right now.

Now If I go with per diem It is benefits for me. How ever I am afraid possible legal risks with that.

Based on this context I have following questions As per US law is it legally allowed non taxable per diem compensation to employees? What are the pros and cons of having per diem compensation? If I have to report my salary to any one like banks, insurance companies, do I need to include Per diem compensation or not?

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    what is the average contract length: days, weeks, months, years? Will you be able to live on the road or will you still need an apartment or home in one city that you will need to pay for out of base pay? – mhoran_psprep May 3 '14 at 22:59
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Hence new employer pays a part of the salary as per diem compensation along with regular salary and says that per-diem compensation is non-taxable.

Per-diem is not taxable. But that is not what you're describing. It appears that either you or the prospective employer, misunderstood what per-diem is.

As per US law is it legally allowed non taxable per diem compensation to employees?

Yes.

What are the pros and cons of having per diem compensation?

Per-diem is not compensation. It is not part of your salary. It is not part of your employment contract.

If I have to report my salary to any one like banks, insurance companies, do I need to include Per diem compensation or not?

No, because it is not compensation.

Back to the first item:

Per-diem is paid to you during business trips when you're away from your (tax) home. It is not part of your compensation, and is only allowed for business trips. Contract work on site for any prolonged period of time (1 year or more, as a definitive rule, but can be less) is not a business trip. For that period of time your tax home becomes that location, so you're not away. You're home.

You should discuss it with a licensed tax adviser (EA/CPA licensed in your State), but it seems to me that either you misunderstood something, or your prospective employer is trying to evade taxes (both yours and his) by disguising part of your compensation as per-diem. It is very likely that when you get caught, the employer will just issue you 1099 on the amounts and leave you hanging.

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  • I have to go to the client place and take apartment for the contract period and live near to the client location. What is 1099? How it is impacts me? – Babu May 4 '14 at 0:53
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    @BVR You're moving to the location? In this case it cannot be considered a business trip at all. You're moving there, your home is there, on what basis can your employer justify per-diem? This looks more and more like some tax evasion trick to me. 1099-MISC is the IRS form to report non-employee compensation, that is how employers report moneys paid to contractors to the IRS. – littleadv May 4 '14 at 1:02
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Beware if injured on the job they will not add per diem to your wages meaning you make less and your wc benefits will be less !!

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