Per Diem: What It Means for Employers

What it means in practice

IRS Publication 463 defines a per diem allowance as "a fixed amount of daily reimbursement" an employer gives an employee for lodging and meals and incidental expenses (M&IE) when the employee is away from home on business. Incidental expenses are narrow: fees and tips given to porters, baggage carriers, hotel staff and staff on ships. The General Services Administration (GSA) sets per diem rates for federal employees traveling in the 48 contiguous states and the District of Columbia (CONUS); the Department of Defense sets rates for Alaska, Hawaii and U.S. territories, and the State Department sets foreign rates. Pub. 15 says an employee is treated as having accounted for the amount if the allowance does not exceed the federal rates. Per diem is not part of an employee's wages as long as the plan and the amounts meet the IRS rules described below.

When an employee is traveling away from home. Pub. 463 says an employee is away from home when duties require being away from the general area of the tax home substantially longer than an ordinary day's work and the employee needs sleep or rest to meet the demands of the work. The tax home is generally the regular place of business. An assignment in a single location is temporary if it is realistically expected to last, and does last, 1 year or less. If it is expected to last more than 1 year, it is indefinite, the location becomes the new tax home, and Pub. 463 says amounts received for living expenses must be included in income even if the employee accounts for them. A series of short assignments to the same place may also be indefinite.

The accountable plan. Per diem is tax-free only when paid under an accountable plan. Pub. 15 (2026) lists three rules: the employee paid or incurred allowable expenses while performing services, the employee substantiates them within a reasonable period, and the employee returns any excess within a reasonable period. The payment must not be an amount that would otherwise have been paid as wages. Amounts paid under an accountable plan "aren't wages" and are not subject to income tax withholding, Social Security, Medicare or FUTA tax. Besides the 30/60/120-day safe harbors, a quarterly statement asking employees to account for or return outstanding amounts, answered within 120 days, also works. The rules apply employee by employee (26 CFR 1.62-2(i)).

How a per diem proves the amount. Under Rev. Proc. 2019-48, the amount deemed substantiated for each day is the lesser of the per diem paid or the federal rate for the "locality of travel," meaning where the employee stops for sleep or rest. Pub. 463 adds four conditions: the employer reasonably limits payments to ordinary and necessary expenses, the allowance is similar in form to and not more than the federal rate, the employee proves time, place and business purpose within a reasonable period, and the employee is not related to the employer. Related includes a corporation in which the employee owns more than 10% of the stock (Rev. Proc. 2019-48, section 6.07). Using these rates is optional, and Pub. 5137 confirms an employer may pay less than the federal rate.

Three ways to set the federal rate. The regular federal per diem rate is the GSA lodging rate plus the M&IE rate for the locality. The M&IE-only rate (Pub. 463 calls it the standard meal allowance) applies when the employer furnishes lodging, pays the hotel directly, reimburses actual lodging from receipts, or has no reasonable belief the employee had lodging costs, such as when the employee stays with friends. The high-low method replaces the city-by-city list with two rates; Notice 2026-60 treats localities with a federal per diem rate of $280 or more as high-cost and lists them by county and season. For FY2027, GSA kept the M&IE tiers at $68 to $92 and raised standard CONUS lodging from $110 to $113.

Switching rates each fall. New GSA rates take effect October 1. Pub. 463 lets an employer keep the rates it used for January through September or switch to the new rates for October through December, applied consistently. An employer on the high-low method must stay on it through December 31 and use the same rates for all employees reimbursed under it, and an employer that did not use high-low during the first 9 months of a year cannot start it before the next year.

Partial days and meals provided. The M&IE rate covers a full day, so departure and return days are prorated. Pub. 463 Method 1 allows 3/4 of the M&IE rate on those days; Method 2 allows any consistently applied, reasonable method, and Pub. 463 notes an employer may treat travel from 9 a.m. one day to 5 p.m. the next as 2 full days. GSA's M&IE breakdown shows the 75% amount for the $68 tier as $51.00. An employer is not required to reduce the M&IE rate for meals provided in kind if it reasonably believes the employee will incur meal and incidental expenses each day (Rev. Proc. 2019-48, section 6.03).

Payroll treatment of the excess. If a per diem exceeds the federal rate for substantiated days, the employee does not have to return the difference, but it is treated as paid under a nonaccountable plan (26 CFR 1.62-2(h)(2)(i)(B)). For a per diem paid as a reimbursement, the employer withholds and pays employment taxes on the excess in the payroll period it reimburses; for an advance, no later than the first payroll period after the one in which the travel days are substantiated. Pub. 15 treats nonaccountable payments as supplemental wages subject to income tax, Social Security, Medicare and FUTA. On the Form W-2, the excess goes in boxes 1, 3 (up to the Social Security wage base) and 5, and the nontaxable amount up to the federal rate goes in box 12 with code L. Days the employee did not travel are different: the allowance for those days must be returned within a reasonable period, or it becomes wages.

Arrangements that fail. If an employer would pay the same amount whether or not the employee travels, the business connection test fails and every dollar is wages (26 CFR 1.62-2(d)(3)(i)). Pub. 463 illustrates this with a monthly salary of which $50 a day is designated as travel reimbursement. Rev. Proc. 2019-48 adds that all per diem payments are wages if the arrangement shows a pattern of abuse, such as routinely paying above the deemed-substantiated amount with no process to identify or tax the excess (section 8.06), and that a second payment for expenses already covered by a per diem is wages (section 6.06). A per diem computed like pay, for example by hours worked or miles traveled, qualifies only in the limited cases described in 26 CFR 1.62-2(d)(3)(ii).

Overtime and the regular rate. For non-exempt employees, the Fair Labor Standards Act excludes "reasonable payments for traveling expenses" from the regular rate used to figure overtime (29 U.S.C. 207(e)(2), quoted in DOL Opinion Letter FLSA2024-01). The regulation lists living expenses of an employee traveling away from home on the employer's business as an excludable reimbursement, but only the actual or reasonably approximate amount is excluded; if a payment is "disproportionately large, the excess amount will be included in the regular rate" (29 CFR 778.217(b)(3) and (c)(1)). A reimbursement at or below the Federal Travel Regulation or IRS per diem amount is per se reasonable, and a higher amount is not presumed unreasonable (778.217(c)(2) and (3)). Quoting the Wage and Hour Division's Field Operations Handbook, the letter says a payment to an employee who incurs no expenses, or one that "varies with the number of hours worked," is included in full. For travel time, see hours worked.

Contractors and employer deductions. Pub. 463 says an independent contractor who does not account to the client for reimbursed expenses includes them in income, and the client reports them with other fees on Form 1099-MISC once the filing threshold is met (the 2026 Form 1099-MISC instructions put it at $2,000 for most payment types). For the employer, Pub. 463 says business meal deductions are generally limited to 50% (80% for workers under Department of Transportation hours-of-service limits), and Notice 2026-60 sets the meal portion of the high and low rates at $86 and $74. The notice also sets a special transportation industry M&IE rate of $80 in CONUS and $86 outside CONUS, and a $5 daily incidental-expenses-only rate.

Where states differ (example). Some states require reimbursement itself, not just tax treatment. California's Division of Labor Standards Enforcement says "all necessary expenses incurred in connection with employer-required travel must be reimbursed to the employee" under Labor Code Section 2802.

Recordkeeping. Keep each employee's trip records showing dates, place and business purpose, the rate table and method used, and returned advances. Pub. 463 says documentary evidence is not needed for meals or lodging covered by a per diem under an accountable plan, but Pub. 5137 notes miscellaneous items such as cab fares, room taxes and laundry are outside the per diem and need their own substantiation. FLSA records must show "the amount and nature of each payment" excluded from the regular rate (29 CFR 516.2(a)(6)(iii)).

Questions employers ask. Are lodging taxes part of the lodging rate? No; GSA says CONUS rates exclude lodging taxes, and Pub. 5137 treats room tax as a separate expense. Can an employee who owns more than 10% of the company use per diem? Not to deem the amount substantiated; Rev. Proc. 2019-48 excludes related parties, so actual expenses must be proved. Confirm specifics with a qualified tax professional.

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