Does Per Diem Include Hotel, Meals, and Incidentals?

The term “per diem” is a Latin phrase meaning “for each day.” In business, it refers to a fixed daily allowance an organization provides to an employee to cover expenses incurred while traveling for work, such as lodging, meals, and other small expenses. This payment system is designed to simplify expense management for both the employee and employer, as it does not require a detailed report for every single purchase.

The Components of a Per Diem Rate

A per diem payment is a composite figure that consists of two primary parts. The first component is for lodging, which is the amount designated to cover the cost of the employee’s hotel or motel room, including any associated taxes and fees. This portion of the allowance is specifically for the expense of overnight accommodation.

The second component is for Meals and Incidental Expenses, commonly referred to as M&IE. This part of the allowance covers the cost of a traveler’s meals. It also includes incidental expenses, which are small costs such as tips for hotel staff, baggage handlers, and laundry or dry-cleaning services.

How Per Diem Lodging Rates Are Determined

The U.S. General Services Administration (GSA) is the federal body that establishes the per diem rates for government travel within the continental United States (CONUS). These rates, updated annually for the fiscal year beginning October 1st, serve as a benchmark for many private sector companies. The GSA determines the maximum lodging allowance by analyzing hotel industry data to calculate the average daily rate for accommodations in specific geographic areas.

These lodging rates vary significantly by location to reflect the different costs across the country. The GSA sets a “standard” lodging rate that applies to most counties where costs are lower. For major cities and high-cost areas, the GSA establishes higher, “non-standard” rates to ensure the allowance is adequate for reasonable accommodations.

For fiscal year 2025, the standard CONUS lodging rate is set at $110 per night. The M&IE rates are also tiered, with the standard rate for fiscal year 2025 being $68. In non-standard areas, rates are higher to align with local market conditions, with M&IE allowances ranging up to $92.

Practical Application of Lodging Per Diem

How the lodging portion of a per diem is handled can differ between employers, as company policy dictates the specific rules. If the actual cost of a hotel exceeds the designated per diem for that location, some employers may require the employee to cover the difference. If an employee finds lodging for less than the per diem rate, company policy will determine if they can keep the difference.

A frequent alternative is for an employer to pay the actual cost of the hotel directly or require a receipt for reimbursement. In this scenario, the company separates the lodging expense from the daily allowance. The employee then receives a per diem payment that only covers the M&IE portion. This method gives the employer more control over lodging costs while still providing a daily stipend for meals and incidentals.

Tax Treatment of Per Diem Payments

The tax implications for an employee receiving per diem payments depend on whether the employer’s reimbursement arrangement qualifies as an “accountable plan” under IRS rules. For a plan to be accountable, it must have a business connection for the expenses and require employees to substantiate those expenses to the employer. Substantiation can be simplified by using the federal per diem rates.

When an employer uses per diem rates and has an accountable plan, the payments are not considered part of the employee’s wages and are not subject to income or payroll taxes. This is because the allowance is treated as a reimbursement for business expenses. If the per diem payments exceed the allowable federal rates, the excess amount is treated as taxable income.

Payments made under a “non-accountable plan,” which fails to meet the IRS requirements, are fully taxable to the employee. These payments must be reported as wages on their Form W-2.