Do Per Diems Get Taxed? A Breakdown for Employees

Per diem payments are a common way employers reimburse employees for business-related expenses, particularly during travel. Understanding the tax implications of these payments is a frequent question for many individuals. The taxability of per diems is not always straightforward and depends on several factors, including how the employer structures the reimbursement arrangement. This complexity often leads to confusion regarding what constitutes taxable income versus a non-taxable reimbursement.

Defining Per Diem Payments

A “per diem” refers to a daily allowance provided to employees to cover costs incurred during business travel away from their regular place of business. This allowance is specifically intended for lodging, meals, and incidental expenses. Per diems simplify the reimbursement process, eliminating the need for employees to collect and submit detailed receipts for every expense. Instead, a per diem provides a fixed amount per day, offering convenience for both the employee and the employer by streamlining administrative tasks.

Tax Treatment for Employees

The tax treatment of per diem payments for employees hinges primarily on whether the employer’s reimbursement arrangement qualifies as an “accountable plan” or a “non-accountable plan” under Internal Revenue Service (IRS) regulations. This distinction determines if the per diem amounts are included in an employee’s taxable income.

Accountable Plan Requirements

For per diem payments to be non-taxable, they must be made under an accountable plan, as defined by Internal Revenue Code Section 62. An accountable plan must satisfy three requirements.

First, the expenses must have a business connection, meaning they are incurred while performing services as an employee for the employer.

Second, the employee must adequately substantiate the expenses within a reasonable period. While detailed receipts for every single expense are not always required when using per diem rates, the employee must still provide documentation for the time, place, amount, and business purpose of the travel. The IRS considers substantiation within 60 days of incurring the expense to be reasonable.

Third, any amount paid to the employee in excess of the substantiated expenses or IRS-approved rates must be returned to the employer within a reasonable period. The IRS considers the return of excess amounts within 120 days of the expense being paid or incurred as reasonable. When all these conditions are met, per diems paid up to the IRS-approved per diem rates are not considered taxable income and are not reported on Form W-2.

Non-Accountable Plan

If an employer’s per diem arrangement fails to meet any of the three requirements for an accountable plan, the payments are treated as made under a non-accountable plan. The entire per diem amount is considered taxable income to the employee. These amounts are subject to federal income tax, Social Security (FICA), and Medicare taxes, as well as other applicable payroll taxes. Consequently, per diem payments made under a non-accountable plan will be included in the employee’s gross wages and reported in Box 1 of their Form W-2.

Employers often refer to the IRS per diem rates, such as the standard Continental United States (CONUS) rate, as a benchmark. For Fiscal Year 2025, the standard CONUS rate is $178 per day, which includes $110 for lodging and $68 for meals and incidental expenses. Employers are not legally obligated to use these specific rates, but amounts paid above these rates (if not substantiated by actual expenses) become taxable to the employee.

Employer Responsibilities

Employers play a central role in the tax treatment of per diem payments through their policies and administrative practices. Establishing a clear, written per diem policy is important for employers who intend for these payments to be non-taxable to their employees. This policy must align with IRS accountable plan rules to ensure compliance and proper tax reporting.

Maintaining detailed records is an employer responsibility. Employers must keep documentation of all per diem payments made, employee substantiation, and any amounts that employees return as excess. Accurate recordkeeping supports the non-taxable status of per diems and helps demonstrate adherence to IRS regulations.

Employers must correctly handle tax withholding and reporting. If per diems are considered taxable because they do not meet accountable plan requirements, or if excess amounts are not returned, employers must withhold income tax, Social Security, and Medicare taxes from these payments. Taxable per diems are then reported on the employee’s Form W-2 in Box 1. Conversely, non-taxable per diems paid under a qualified accountable plan are not reported on the W-2.

Employee Considerations

Employees should understand their employer’s per diem policy to determine whether it operates as an accountable or non-accountable plan. This understanding directly impacts how per diem payments affect their personal tax situation. Providing timely and adequate substantiation of expenses to the employer remains a key responsibility for employees. Even when receiving a fixed per diem, employees must fulfill their obligation to document the business purpose, time, and place of their travel. Meeting these substantiation requirements ensures that the per diem payments can remain non-taxable.

If per diem amounts are included in an employee’s Box 1 wages on their Form W-2, these amounts are considered taxable income and must be reported on their individual tax return. This inclusion signifies that the payments were made under a non-accountable plan or that accountable plan rules were not fully met. For most W-2 employees, unreimbursed employee business expenses are no longer deductible for tax years 2018 through 2025 due to changes introduced by the Tax Cuts and Jobs Act of 2017. Employees facing complex tax situations should consider consulting with a qualified tax professional for personalized advice.