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.

I've seen this exact scenario play out multiple times, and it never ends well for the contractor. What you're describing is a classic "per diem mill" operation that preys on contractors who don't fully understand IRS regulations. The fundamental issue is that per diem is only tax-free when you're working temporarily away from your established tax home. Since you'd be relocating permanently to Massachusetts for an 18+ month assignment with the expectation of staying long-term, Massachusetts would immediately become your new tax home under IRS rules. The recruiter's advice about keeping your old driver's license is particularly concerning - that's deliberate tax fraud. They're essentially asking you to lie to the IRS about your residency to support an illegitimate tax position. Here's what I'd recommend: Ask the recruiter to provide written documentation from a tax attorney or CPA explaining how this arrangement complies with IRS regulations. They won't be able to provide it because it doesn't exist. Then propose restructuring the offer as $85/hour fully taxable W-2 income. If they refuse to restructure it properly, walk away. No job is worth the risk of owing the IRS tens of thousands in back taxes plus penalties and interest. There are plenty of legitimate opportunities out there that don't require you to gamble with tax fraud.

I appreciate everyone sharing their experiences and insights on this per diem situation. As someone who's dealt with questionable tax arrangements before, I want to emphasize how important it is to get multiple perspectives before making a decision. What really stands out to me from this discussion is the pattern of legitimate companies being willing to restructure offers when challenged, while sketchy operations push back or get defensive. That's probably the best test of whether you're dealing with a reputable employer. The tax consequences everyone's describing are very real. I had a colleague who got caught in a similar per diem arrangement a few years ago - the IRS audit resulted in over $40K in back taxes, penalties, and interest. It completely wiped out any perceived tax advantage and then some. For anyone facing similar situations, I'd recommend documenting everything in writing. If a recruiter or company is making tax claims about compensation structures, ask them to put it in writing and provide supporting documentation from tax professionals. Their response will tell you everything you need to know about the legitimacy of the arrangement. Stay safe out there, and remember - if something feels sketchy from a tax perspective, it probably is!

This situation you're describing is unfortunately very common in the contracting world, and you're absolutely right to be suspicious. I've seen this exact "per diem split" scheme countless times, and it's a major red flag. The core issue is that legitimate per diem only applies to temporary work assignments away from your tax home - typically less than one year. Since you'd be relocating to Massachusetts for 18+ months with the expectation of permanent employment, the IRS would consider Massachusetts your new tax home immediately. This makes the entire per diem arrangement taxable income, regardless of how the recruiter frames it. What's particularly concerning is their suggestion about maintaining your old driver's license - that's explicitly encouraging tax fraud. No legitimate company would ever advise you to deceive the IRS about your residency status. Here's what I'd recommend: counter their offer by requesting the full $85/hour as properly taxed W-2 income. If they refuse or push back hard on restructuring it legitimately, that tells you everything you need to know about their ethics. Remember, when the IRS eventually audits these arrangements (and they do), you're the one who'll face the penalties, interest, and back taxes - not the recruiting firm. Trust your instincts on this one. The short-term perceived tax advantage isn't worth the long-term risk of owing potentially tens of thousands to the IRS.

This entire thread has been incredibly eye-opening about per diem schemes in contracting. As someone who's been approached with similar "tax-advantaged" compensation structures, I really appreciate everyone sharing their experiences and expertise. What's particularly striking is how consistent the pattern is - recruiters pushing these arrangements always seem to get defensive or evasive when asked for proper documentation or tax professional backing. Meanwhile, the legitimate companies are transparent and willing to restructure offers properly. The $40K audit story that PixelPioneer shared really drives home the stakes here. Even if you never get audited, you're essentially living with a ticking time bomb that could explode years later when you least expect it. The peace of mind from having a fully compliant compensation structure is worth far more than any perceived short-term tax advantage. For Sofia and anyone else facing similar situations, I think the advice about requesting everything in writing and asking for tax professional documentation is spot on. If they can't or won't provide it, that tells you everything you need to know. Better to walk away from one questionable opportunity than risk years of IRS complications down the road. Thanks to everyone who contributed their knowledge here - this is exactly the kind of community wisdom that helps people avoid costly mistakes!

As someone who works in government compliance, I want to emphasize just how serious these per diem scheme violations can be from an enforcement perspective. The IRS has been increasingly aggressive about auditing contractor compensation arrangements, especially in the tech sector where these "per diem mills" have become rampant. What many contractors don't realize is that the IRS often targets these schemes through data matching - they compare contractor filings against company payroll records and look for patterns that suggest non-compliant per diem arrangements. When they find discrepancies, they don't just audit one person - they often audit entire groups of contractors who worked for the same firms. The recruiter's suggestion about keeping your old driver's license is particularly egregious because it creates a paper trail of intent to deceive. If you're ever audited, having maintained false residency documentation while claiming per diem exemptions could escalate this from a civil tax matter to potential criminal fraud charges. I'd strongly recommend not just walking away from this offer, but also reporting this recruiting firm to the appropriate authorities. These schemes hurt legitimate contractors by creating unfair competition and undermine tax compliance across the entire industry. Trust your instincts here - any company or recruiter promoting tax avoidance schemes this aggressively is not worth the risk to your professional reputation or financial future.

This thread has been absolutely invaluable for understanding the serious risks behind these per diem schemes. As a newcomer to the contracting world, I had no idea how widespread these questionable arrangements were or how devastating the consequences could be. What really struck me was the consistency of everyone's advice - from experienced contractors to those with government compliance backgrounds, everyone is saying the same thing: these arrangements are extremely risky and not worth the potential consequences. The $40K audit story and the escalation to potential criminal fraud charges really drive home just how much is at stake. The practical advice about requesting written documentation from tax professionals seems like such a simple but effective litmus test. If recruiters are confident these arrangements are legitimate, they should have no problem providing proper backing. Their refusal or defensiveness tells you everything you need to know. For Sofia and anyone else facing similar situations, it sounds like the safest approach is to counter with a fully taxable offer at the equivalent rate and walk away if they won't restructure it properly. No job opportunity is worth risking your financial future or legal standing. This is exactly the kind of community knowledge sharing that helps people avoid costly mistakes. Thanks to everyone who took the time to share their expertise and real-world experiences!