Do You Get Taxed on Per Diem Payments?

Per diem payments are a common method employers use to reimburse employees for business-related expenses, particularly when traveling. Understanding how these payments are treated for tax purposes is important for both employers and employees. The taxability of per diem largely depends on how the employer’s reimbursement arrangement is structured and whether it meets specific Internal Revenue Service (IRS) guidelines.

What Per Diem Is

Per diem, meaning “by the day,” refers to a fixed allowance paid by employers to employees to cover lodging, meals, and incidental expenses incurred while traveling away from home on business. This allowance simplifies the reimbursement process by providing a predetermined amount rather than requiring employees to track and submit receipts for every single expense. The purpose of per diem is to ensure employees are not out-of-pocket for necessary costs associated with their work-related travel. It provides a standardized way for businesses to manage these common operational expenditures.

Accountable Plans

For per diem payments to be non-taxable to the employee, the employer’s reimbursement arrangement must qualify as an “accountable plan” under IRS regulations. This designation requires adherence to three specific criteria. First, the expenses must have a business connection, meaning they were incurred while performing services as an employee for the employer.

Second, the employee must adequately substantiate the expenses to the employer within a reasonable period. For per diem, this typically involves proving the time, place, and business purpose of the travel, rather than itemizing every meal or lodging expense. Generally, substantiation is considered timely if provided within 60 days after the expenses were paid or incurred.

Third, the employee must return any excess per diem payments to the employer within a reasonable period. Excess payments are amounts received that are greater than the substantiated business expenses. A common guideline for a reasonable period to return excess amounts is within 120 days after the expense was paid or incurred, or after a periodic statement is provided. When these three requirements are met, the per diem payments are not considered taxable income to the employee and are not reported as wages on their Form W-2.

Non-Accountable Plans

Conversely, a per diem arrangement that fails to meet any one of the three requirements for an accountable plan is classified as a “non-accountable plan.” This occurs if, for example, the expenses lack a clear business connection, the employee does not adequately substantiate the costs, or they are not required to return excess payments. Under a non-accountable plan, the per diem amounts are treated as additional taxable income to the employee.

These payments are considered wages and are subject to federal income tax withholding, Social Security, and Medicare taxes (FICA). The employer is responsible for withholding these taxes from the employee’s pay. Consequently, receiving per diem under a non-accountable plan directly increases an employee’s taxable earnings, impacting their overall take-home pay.

Reporting Per Diem

The method for reporting per diem payments for tax purposes depends entirely on whether the employer’s plan is accountable or non-accountable. When per diem is paid under an accountable plan, and all the requirements are met, the amounts are generally not reported on the employee’s Form W-2. These non-taxable reimbursements are not included in the employee’s gross wages. The employee does not need to report these amounts on their personal tax return, as they are not considered income.

However, if per diem payments are made under a non-accountable plan, or if an accountable plan’s requirements are not fully satisfied, the payments are included in the employee’s gross wages. These taxable per diem amounts will be reported in Box 1 of the employee’s Form W-2, alongside their regular salary or wages.