Do You Have to Pay Taxes on Per Diem?

Per diem payments are a common method employers use to reimburse employees for business travel expenses such as lodging, meals, and incidental costs. The question of whether these payments are taxable is a frequent concern for individuals. The taxability of per diem hinges on specific Internal Revenue Service (IRS) rules and how an employer structures these payments.

Understanding Taxable Per Diem

Per diem payments become taxable income when provided under a “non-accountable plan” as defined by the IRS. Under such a plan, employees are not required to provide substantiation for their expenses or return any per diem that exceeds their actual expenses.

When paid through a non-accountable plan, the IRS treats these amounts as regular wages. These payments are subject to federal income tax, Social Security, and Medicare taxes. Employers include these taxable per diem amounts in Box 1, “Wages, tips, other compensation,” on the employee’s Form W-2. An example is a flat, untracked allowance given for travel.

Conditions for Non-Taxable Per Diem

Per diem payments can be non-taxable if they meet the requirements of an “accountable plan” as defined by the IRS. An accountable plan must satisfy three key IRS rules. The first is the “business connection,” meaning expenses must have a clear business purpose, such as travel away from the employee’s tax home for work-related duties. An employee’s tax home is generally the entire city or general area of their main place of business.

The second requirement is “substantiation,” where the employee must provide adequate accounting to the employer for expenses incurred. This involves detailing the amount, time, place, and business purpose of the expenses. To simplify, employers and employees can use IRS per diem rates, which serve as a “safe harbor” method. Using these rates means actual receipts for meals and lodging are generally not required, though trip details must still be documented.

The third rule for an accountable plan is the “return of excess” amounts. Employees must return any per diem funds that exceed their substantiated expenses or the applicable IRS per diem rates within a reasonable period, generally 120 days after expenses were paid or incurred. If an accountable plan is properly followed, per diem payments up to federal rates are not included in the employee’s taxable income and are not reported on their Form W-2. If per diem paid by an employer exceeds federal rates, only the excess portion becomes taxable income. Per diem does not apply to regular commuting expenses or costs incurred at a permanent work location.

Tax Reporting and Record Keeping

Tax reporting for per diem depends on whether it is taxable or non-taxable. Taxable per diem payments are included in Box 1 of the employee’s Form W-2. Non-taxable per diem payments are not included in Box 1 of the W-2.

Maintaining meticulous records is important for both employees and employers. Employees should keep detailed records, such as travel logs and receipts for significant expenses, to substantiate their per diem, especially under an accountable plan or if they receive excess per diem. Self-employed individuals do not receive per diem from an employer, but they can deduct business travel expenses. They may use federal per diem rates to simplify expense calculations for meals and incidental expenses when reporting on Schedule C (Profit or Loss from Business).

The Tax Cuts and Jobs Act (TCJA) of 2017 suspended the deduction for most unreimbursed employee business expenses from 2018 through 2025. This change makes the distinction between taxable and non-taxable per diem from an employer even more important, as employees generally cannot deduct expenses their employer does not reimburse under an accountable plan.