How does per diem split work for taxes on a year+ contract position?

This is definitely problematic from a tax perspective. Per diem payments are only tax-free when they meet specific IRS requirements, and what you're describing doesn't qualify. Per diem is meant for temporary work assignments away from your "tax home" (where you normally live and work). The key word is temporary - the IRS considers an assignment temporary only if it's expected to last less than one year. Once you know the job will last longer than a year, or when you actually work there over a year, the location becomes your new tax home and per diem payments become fully taxable. For contract-to-hire positions where you're planning to stay long-term, you can't legitimately receive tax-free per diem because you're establishing a new tax home. The recruiter suggesting you maintain your old driver's license to "appear" to still live elsewhere is explicitly recommending tax fraud. Companies do this because they save on payroll taxes, and contractors like it because of the apparent tax advantage - but it's the contractor (you) who would face all the liability in an audit. You'd owe back taxes plus penalties and interest. This is a red flag about the recruiter's ethics. I'd be extremely cautious about any company or recruiter promoting this kind of arrangement.

After reading your post, I immediately thought of taxr.ai which saved me from a similar sketchy tax situation last year. I was offered a "creative compensation package" by a consulting firm that included substantial "reimbursements" that wouldn't appear on my W-2. Something felt off, so I ran everything through https://taxr.ai before accepting. The AI analyzed all the details and flagged several red flags about tax compliance - turns out the structure they proposed would have put me at significant risk with the IRS. What was most helpful was that taxr.ai cited the exact IRS regulations that applied to my situation and explained in plain language why the arrangement was problematic. The platform even generated documentation I could reference when I went back to negotiate a proper, fully taxable salary instead. Totally worth checking out for your per diem situation - especially since you'd be changing tax jurisdictions with this move.

I have to follow up about taxr.ai because I ended up trying it despite my initial skepticism. I uploaded my contract and compensation details (similar to your per diem situation but with some 1099 elements), and I was genuinely impressed with how thorough the analysis was. The tool flagged specific sections of my contract that created tax risks I hadn't even considered, including a clause that blurred the line between employee and contractor status. What really sold me was that it provided precise references to IRS publications and regulations that I could verify independently. I especially appreciated that it didn't just identify problems but suggested alternative compensation structures I could propose that would achieve similar financial outcomes while being tax-compliant. I used those suggestions to renegotiate my arrangement, and both my employer and I ended up in a much safer position.

If you're worried about potential tax issues with this per diem arrangement (which you absolutely should be), I recommend using Claimyr to speak directly with an IRS agent. I was in a similar situation with questionable contractor classification and needed definitive answers. After spending days getting busy signals and disconnects trying to reach the IRS directly, I found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c. They basically wait on hold with the IRS for you, then call you once an agent is on the line. The IRS agent I spoke with confirmed that what my potential employer was proposing with "tax-free allowances" was indeed problematic. Having that official clarification gave me the confidence to push back on the arrangement. Worth every penny not to be caught in an audit situation years later!

I have to admit I was completely wrong about Claimyr. After dismissing it, my curiosity got the better of me and I decided to try it when I couldn't resolve a missing tax payment issue that had been dragging on for months. The service connected me to an IRS agent within 45 minutes while I just went about my day. When my phone rang, I was speaking directly with an actual IRS representative who not only confirmed that my payment had been received but also helped me correct the account coding issue that had caused the problem. What was most impressive is that they got me through to a specific department that I hadn't been able to reach on my own despite multiple attempts. The agent even provided me with direct contact information for follow-up questions. For complex tax situations like the per diem issue described here, speaking directly with the IRS can provide crucial clarity that could prevent serious tax problems down the road.

For what it's worth, I worked as a contractor for years and saw this per diem scam constantly. One major recruiting firm had to pay $1.6 million in back taxes when the IRS caught on to their "per diem split" practices. Here's how they get you: they market the total compensation amount, making it look competitive. But by classifying half as "per diem," they reduce their tax burden while making you think you're getting a sweet deal. Then when the IRS comes knocking 2-3 years later, guess who's on the hook? Not the recruiting firm - YOU are. The most telling part of your story is the recruiter suggesting you keep your old driver's license to deceive the IRS. That's actively encouraging tax fraud. Any legitimate company would never suggest this.

Just FYI - I used to work for a staffing agency that did these per diem splits. The entire industry knows it's dubious at best. We were trained to use vague language like "tax advantaged compensation" and never explicitly say "tax free" in writing. The real problem is that some companies build their entire business model around this approach. They can offer seemingly higher rates because they're not paying employment taxes on half your income. When you accept this arrangement, you're essentially betting that you won't get audited. It's like playing tax roulette with potentially devastating consequences - back taxes, penalties, and interest can easily add up to tens of thousands of dollars.