All the Tax Rules for Per Diems You Need to Know

Less than 1% of tax returns get audited. However, you want to make sure your business falls within the other 99%.  

Filing business taxes are typically more complicated than individual returns. That's because there are so many variables involved in the return process.

If you have employees who travel for business, you might be considering per diem allowances. 

What Does a Per Diem Cover?

Per diems don't include your transportation to and from locations. As a business owner, you can make those travel arrangements for your employees. You can also let them book their travel and reimburse them later.

Two options for deciding per diems:

• Lodging and meal costs combined
• Only meal costs

An employer can choose to use either method when they reimburse their employees' travel expenses. You can provide employees with per diem upfront, or you can reimburse your employees when they return. Upfront payment might come in the form of a company credit card or cash.

Here are some of the items that the IRS deems eligible for per diems:

• Meals
• Lodging
• Room service
• Laundry (including dry cleaning and pressing clothes)
• Fees and tips for service providers (like food servers and baggage handlers)

Note: A self-employed individual can only use per diem rates for meal costs.

Are Per Diem Payments Included in Wages?

If the payment is equal to or less than the federal per diem rate, then per diem payments are NOT part of an employee's wages. Also, the employer must receive an expense report from the employee for each trip or expense.

The report must include details such as:

• The date and location of the trip
• The business purpose of the trip
• Receipts for lodging (if they're using the meals-only per diem rate)

The employee has to file the expense report within a reasonable period (usually 60 days). On failing to do so, the payment becomes taxable to the employee.

Is Per Diem Taxable?

Per diem payments become taxable under the following conditions:

• No expense report is filed with the employer
• The expense report doesn't include vital information, such as the date, time, place, and business purpose
• The employee gets a flat amount (and therefore, no expense report is required)
• Per diem gets paid over the allowable standard rate

For all of the above circumstances, per diem payments would be treated as wages, and taxes are due from the employer.

Tax Implications of Per Diem Reimbursements

In the US, the tax implications for companies providing per diem to employees typically depend on whether the per diem is for:

Meals and Incidental Expenses (M&IE)

• Non-accountable Plan: If you provide per diem for M&IE without requiring your employees to account for their actual expenses, the per diem amount may be considered taxable income for them. In such cases, you must include the per diem payments in their wages, subject to income tax withholding and payroll taxes.

• Accountable Plan: If you establish an accountable plan for per diem, your employees must substantiate their M&IE expenses. In this case, the per diem payments are typically not included in their taxable income. As a result, you do need to withhold income taxes or pay payroll taxes on the per diem amounts.

Lodging Expenses

• Taxable Compensation: Payments or reimbursements made by your organization for lodging expenses are generally considered taxable compensation for employees. You must include the lodging payments in their wages and withhold income taxes accordingly. Payroll taxes may also apply.

When Should I Use Actual Expense Reimbursement? 

Certain scenarios may require actual expense reimbursement rather than a standard per diem:

1. Prearranged Accommodations: When lodging and/or meals are arranged at specific locations for meetings, conferences, or training sessions.
2. Increased Costs Due to Special Events: If special events (such as major sports events or conventions) lead to elevated costs that surpass prescribed allowances, or if commuting to less expensive lodging would negate savings.
3. Disaster Areas: When traveling to a Presidentially-Declared Disaster area, where a blanket actual expense authorization may apply.
4. Mission Requirements: When specific mission needs require actual expense reimbursement.
5. Agency Approval: Any other reasons approved by your agency.

Authorization and Approval 

Requests for actual expense reimbursement should be made before travel. Some agencies may grant post-travel approvals with sufficient justification. Agencies can also issue blanket authorizations.

Reimbursement Limits

The maximum reimbursement allowed is up to 300 percent of the applicable per diem rate. If expenses exceed this ceiling, reimbursement is limited to the 300 percent cap. You must itemize all expenses, including meals, and provide receipts for lodging and individual meals over $75. Your agency may require receipts for other expenses and will inform you of these requirements before travel.

Per Diem Rates by Location

Per diem rates vary based on location. The General Services Administration (GSA) sets standard rates, which are updated annually. Rates are higher in major cities and fluctuate based on supply and demand.

Note: The FY 2025 rates will not apply until October 1, 2024. To view the FY 2025 Meals & Incidental Expenses (M&IE) Breakdown, visit the “Per diem files” page under the “Meals & incidental expenses breakdown” heading and select the “FY25 M&IE Breakdown” file.

Per Diem Rates for FY 2025

• The standard CONUS (Continental United States) lodging rate has increased from $107 to $110.
• The M&IE rate tiers have been revised. The standard M&IE rate has risen from $59 to $68. For non-standard areas, the M&IE rates now range from $68 to $92, up from the previous range of $59 to $79.

Additionally, several locations that were previously classified as Non-Standard Areas (NSAs) have moved into the standard CONUS rate category for FY 2025. These locations include:

• Ft. Wayne, IN (Allen County)
• Canton, OH (Stark County)
• Mentor, OH (Lake County)
• East Greenwich / Warwick, RI (Kent County)
• Waco, TX (McLennan County)
• Wisconsin Dells, WI (Columbia County)

These updates can significantly impact budgeting and expense reporting, so it’s essential for employers to stay informed and adjust their per diem policies accordingly.

Employer Use of GSA Rates

Employers can use GSA rates as a benchmark for per diem policies. These rates are designed to reflect the cost of living in various locations and are updated annually to account for changes in costs.

Per Diem for Business Travel (Mileage)

Per diem does not cover mileage expenses. Businesses typically reimburse mileage separately, according to the IRS mileage rate or a company-specific rate.

Also Read:

• Ultimate Guide to Mileage Reimbursement in 2024: IRS Rates, Rules, and Best Practices

What if I Pay More or Less Than the Standard Per Diem Rates?

Employers can pay more or less than the standard per diem rates, but:

• Paying More: Any excess over the standard rate is taxable to the employee.
• Paying Less: The IRS allows two methods to handle lower per diem amounts:some text
  • Allocate 60% for lodging and 40% for meals.
  • Deduct the standard meals and incidentals rate from the total per diem and treat the remainder as lodging.

As an employer, regardless of what rates you choose, just make sure you're consistent.

What Is Per Diem Employment?

Per diem employment refers to workers who are paid a daily rate instead of an hourly wage. This arrangement is often used for temporary or substitute workers. They can be classified as contractors or employees, depending on the nature of their work and the payroll rules that apply.

Want to know how we can help you stay on top of all your per diem and other business expenses? See how our expense management solution has been designed for stress-free finance teams. 

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