Is Per Diem Taxable for Contractors?

March, 31 2025 by Steve Banner, EA, MBA

What is Per Diem?

I apologize in advance if the term “per diem” provokes unpleasant flashbacks to your days of studying Latin at school, but please allow me to explain that the Latin “per diem” translates to “for each day” in English.

In today’s world, we use the words “per diem” to refer to the monetary allowance paid to employees or contractors to cover their daily expenses while working in a location away from their normal home base. In other words, per diem is a daily allowance given to employees or contractors to cover expenses such as lodging, meals, and incidental costs when they are away from their usual place of work. From the employer’s point of view, this allowance helps simplify the process of reimbursing travel expenses and provides workers with the funds needed to cover their daily costs.
 

What About Taxes on Per Diem?

Whether or not your per diem allowance is taxable depends on several factors, including the way the payments are structured by your employer. The employer can make the payments under what is called an accountable plan or under a non-accountable plan. The tax treatment varies between these two classifications. Please allow me to explain.
 

Accountable Plan

Your per diem payments are not considered taxable if your employer uses an accountable plan to pay your allowance, and all of the following are true:

• Your expenses must have a business connection. In other words, the expenses you paid or incurred must be related to services you performed as a contractor for your employer.
• You must adequately account for your expenses to your employer within a reasonable period of time. Depending on the facts and circumstances of each case, you will meet this requirement if you provide details and dates of your expenses within 60 days after they were paid or incurred.
• Within a reasonable period of time (usually up to 120 days), you must return to the employer any allowance you received that was in excess of the amount that you adequately accounted to your employer.

If your temporary assignment in a single location exceeds one year, your per diem payments under an accountable plan are generally considered to be taxable.
 

Non-Accountable Plan

If your per diem payments do not meet the criteria for an accountable plan, they are regarded as being paid under a non-accountable plan, which means they are considered to be taxable income. In this case:

• You must report your per diem payments as wages on your tax return.
• The payments are subject to income and payroll taxes.

However, you will generally be able to deduct your expenses for lodging, meals, and incidental expenses from your income, provided that they do not exceed the standard rates published by the US General Services Administration for the location of your temporary work site. (See https://www.gsa.gov/travel/plan-book/per-diem-rates.)
 

Documentation and Record Keeping

Proper documentation is crucial for contractors to substantiate their per diem expenses. This may include:

• Receipts for lodging, meals, and incidental expenses.
• Travel itineraries and business purpose statements.
• Records of dates, locations, and duration of travel.

Keeping accurate records ensures compliance with IRS regulations and helps avoid potential tax issues.
 

Conclusion

Per diem payments for contractors can either be taxable or non-taxable, depending on whether they fall under accountable or non-accountable plans. Contractors must understand the requirements and maintain proper documentation to benefit from tax-free per diem payments. Staying informed about IRS guidelines and standard rates is essential for effectively managing travel expenses and tax obligations.