Does Per Diem Include Lodging? How Rates Are Set

Per diem is a daily allowance an employer provides to an employee to cover business travel expenses. This fixed amount simplifies expense reporting by replacing the need to submit receipts for every single cost incurred. A common question is whether this daily rate includes lodging. The answer depends entirely on the reimbursement method the employer chooses to use, as the per diem can be structured to cover lodging and meals, or just meals and incidentals alone.

The Two Components of Per Diem

A full per diem rate has two parts: a lodging allowance and an allowance for meals and incidental expenses (M&IE). The lodging portion covers the cost of a moderately-priced room, including taxes and service charges. This amount is a maximum reimbursement, so an employee is only reimbursed for their actual cost up to the specified limit and does not keep the difference.

The second component is the M&IE rate, which covers meals and small, necessary expenses. Incidental expenses include items like fees and tips for porters, baggage carriers, and hotel staff. Costs for laundry, dry cleaning, or transportation between work locations are not included and are handled as separate expenses. An employer may pay a per diem that only covers M&IE if the company pays for the hotel directly.

Determining Rates with the GSA Method

Employers commonly determine per diem rates using figures published by the U.S. General Services Administration (GSA). The GSA establishes maximum lodging and M&IE rates for locations within the continental United States, which vary based on the cost of living in an area and often change with the season. For example, a trip to a high-cost city during its peak season will have a higher per diem than a trip to a rural area.

Employers and employees can find the applicable rates for any domestic location on the GSA’s official website. A rule when using the GSA method involves the first and last days of travel. On these days, the employee is eligible for only 75% of the standard M&IE rate for their temporary duty location, as a full day’s worth of meals is not consumed. The lodging allowance is not subject to this proration.

Using the High-Low Substantiation Method

As an alternative to GSA rates, the IRS allows employers to use the high-low substantiation method. This approach simplifies bookkeeping by establishing two per diem rates: one for designated “high-cost” localities and another for all other locations within the continental U.S. The IRS publishes a list of these high-cost areas and the corresponding dollar amounts each fiscal year, which runs from October 1 to September 30.

For the period of October 1, 2024, through September 30, 2025, IRS Notice 2024-68 sets the total per diem rate at $319 for any high-cost locality and $225 for any other locality. Of these amounts, the portion for M&IE is $86 for high-cost areas and $74 for all other locations. An employer’s decision to use the high-low method must be applied consistently for an employee throughout the calendar year.

Tax Implications and Recordkeeping

For per diem payments to be non-taxable to the employee, they must be made under an “accountable plan.” An accountable plan requires that expenses have a business connection, the employee must account for the expenses to the employer, and the employee must return any excess reimbursement over federal rates in a reasonable time. If a plan fails these requirements, or if payments exceed federal rates and the excess is not returned, those amounts are considered taxable wages and reported on the employee’s Form W-2.

To comply with an accountable plan, employees must substantiate their travel expenses. While meal receipts are not required when using a per diem rate, the employee must still maintain records that include the time, place, and business purpose of the trip. This information is submitted to the employer in an expense report within a reasonable period, such as 60 days after the expenses were incurred. The employer is responsible for keeping these expense reports.

Rules for the Self-Employed

The rules for per diem differ for self-employed individuals. A self-employed person can use the standard M&IE per diem rates to calculate their meal expense deduction for business travel. However, they are not permitted to use the lodging portion of the per diem rates. Instead, they must deduct their actual lodging costs, which requires keeping detailed records and receipts for all accommodations. This is a limitation for sole proprietors and independent contractors.