Is Per Diem Taxed?

February, 25 2025 by Brittney D. Williams, EA 

If you have ever worked or considered working a job that requires out-of-town travel, you know that incurring travel expenses is inevitable. Travel expenses include transportation, lodging, meals, and other miscellaneous expenses. These expenses can be costly, especially if you travel frequently, the business trips are lengthy, and/or your business trips take you to expensive cities. If so, this can lead to important questions: Do employees pay for travel expenses out of pocket? Is the employee taxed on business travel expenses paid by the employer?

If your employer requires you to travel for business purposes, the employer will generally pay for your travel expenses. The payment for the travel expenses can be made via direct payment of the expenses, an advance allowance to cover the expenses, reimbursement for payments made out-of-pocket, or a combination of methods. Regardless of the payment method, employees need to know whether these amounts are taxable. Knowing the tax rules associated with these business expenses and associated employer payments is also important.

Our discussion will focus on a term called per diem. Let’s dive in!

 

What is per diem?

Per diem in Latin means “per day.” A per diem is the daily allowance paid to employees that covers the cost of business travel expenses which includes items such as lodging, meals, and incidental expenses (M&IE). This allowance is in lieu of paying an employee’s specific travel expenses. Per diem is a convenient resource for employers and employees. It simplifies the reimbursement process. It also aids employees in securing proper accommodations when traveling without incurring out-of-pocket expenses. There are three types of per diem allowances. They are as follows:
 

• Lodging plus M&IE: a per diem allowance that covers lodging along with meals and incidental expenses
• M&IE: a per diam allowance that covers only meals and incidental expenses
• Incidental expenses only: a per diem allowance that covers fees and tips given to porters, baggage carriers, hotel staff, etc.

How does per diem work?

Employers have the ability to set their own per diem rates or use the rates established by the Federal Government. The U.S. General Services Administration (GSA) sets per diem rates for federal government employees who travel for official duty. Standard rates apply to most of the country, and nonstandard, location-specific rates apply to high-cost areas. The federal government sets rates based on the cost of living per city. Therefore, rates can be higher or lower than the standard rate. Many companies establish their per diem policies using the federal per diem rates as guidelines.

Each company decides how to handle the business expenses and any per diem payments. Some companies issue their employee credit cards, while others issue checks or direct deposit payments in advance of the business travel. Others may require their employees to cover the expenses out of pocket first and then request reimbursement later.

GSA has set the standard per diem rates for fiscal year 2025. The standard rate is $178, comprising $110 lodging and $68 M&IE. This standard rate applies to most of the Continental United States (CONUS). There are areas that have higher per diem rates than the standard rate of $178. These areas are called non-standard areas. Below is a breakdown of the Meals & Incidental Expenses component for the continental United States. It includes both the standard and non-standard rates.

M&IE breakdowns for continental U.S. (CONUS)

More information and frequently asked questions on the federal government’s per diem rates can be found here: https://www.gsa.gov/travel/plan-book/per-diem-rates

 

Why do employers pay per diem?
 

Employers choose to use the per diem method of reimbursement because it’s simplified and nurtures employer-employee trust. It can eliminate the need for employees to retain and submit receipts for their travel expenses. The IRS uses the federal per diem rates as the threshold for what it considers as non-taxable employee compensation. Therefore, many companies have adopted federal per diem allowances in their travel reimbursement plans.

Benefits for employers and employees include:
 

• Enables employers to budget future expenses more accurately
• Reduces or eliminates the need for managing receipts
• Paperwork is reduced to a minimum for employers and employees
• The tax deduction process for business travel is streamlined
• Employees don’t have to return per diem amounts they don’t spend

Is per diem taxable?

Per diem allowances are generally not taxable to employees. However, there are some instances in which a per diem becomes taxable:

• An expense report is not submitted to the employer,
• A filed expense report does not include the required date, time, place, amount, and business purpose of the expense(s),
• The employee receives a flat allowance amount without an expense report requirement, or the per diem paid exceeds the allowable federal rate.

Along with amounts, expense reports must include the details for the business purpose of the trip, the date and place, and lodging receipts. They must also be submitted to the employer within a reasonable amount of time, usually within 60 days or even less. If any of these requirements are not met, the per diem payment becomes taxable to the employee.

Example 1:

• Aaron submits an expense report to his employer that includes the total cost of his travel expenses, but he does not provide any details. The reimbursement to Aaron will be taxable since he has not substantiated his expenses by including the date, time, place, amount, and business purpose.

Example 2:

• Lisa’s employer paid her a flat rate of $250 per day for her most recent five-day business trip. According to the guidelines, Lisa submitted a proper expense report in a timely manner. The federal standard per diem rate is $178 per day. Lisa will be taxed on the excess per diem above the federal standard rate as follows:

• $250 - $178 = $72 x 5 days = $360 taxable income

The use of per diem to handle business expenses is a great tool used by the federal government and many companies throughout the United States. As noted, it allows employers to pay for or reimburse their employees’ travel expenses on official business assignments. It reduces or eliminates the need for employees to supply receipts to their employers and streamlines the employers’ process of deducting the expenses paid, which makes it very beneficial. If the guidelines are followed properly, employees are not taxed on per diem received, and employers receive their tax deductions, making it a win-win situation.

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