How Is Per Diem Paid Out to Employees?

Per diem is a fixed daily allowance an employer provides to an employee to cover business travel expenses like meals, lodging, and incidental purchases. Instead of tracking every expense, the company provides a set amount for each day of travel. The way this allowance is paid, its tax implications, and the required paperwork depend on the employer’s internal policies and adherence to tax regulations.

Common Per Diem Payment Structures

The timing of per diem payments follows one of two models: advance payment or post-trip reimbursement. With an advance, an employee receives the estimated per diem funds before the business trip begins, providing cash on hand to cover expenses as they are incurred. This method requires planning from the employer to calculate the total allowance ahead of time.

Alternatively, many organizations use a reimbursement model where the employee initially covers travel expenses out of pocket. After the trip, they submit the required documentation and are paid back for the qualified per diem amount.

The delivery method can also vary. The payment can be included as a line item on a regular paycheck, issued as a separate direct deposit or check, or provided as a cash advance.

Tax Treatment Under Accountable and Non-Accountable Plans

The taxability of per diem payments hinges on whether the employer’s policy qualifies as an “accountable plan” under IRS guidelines. An accountable plan must meet three criteria. The expenses must have a clear business connection, the employee must adequately account for these expenses to the employer in a reasonable period, and the employee must return any excess reimbursement.

When a per diem is paid under an accountable plan, the payments are not considered taxable income to the employee. The funds are not subject to federal or state income taxes or employment taxes, and the reimbursement does not need to be reported on the employee’s Form W-2.

If a plan fails to meet these requirements, it is a “non-accountable plan.” Under a non-accountable plan, all per diem payments are considered taxable wages. The entire amount must be included in the employee’s gross income, reported on their Form W-2, and is subject to income and employment tax withholding.

Substantiation Requirements for Payment

To receive per diem under an accountable plan, an employee must provide substantiation to their employer. This process involves documenting key details of the business trip, usually on a company-provided expense report. The employee is responsible for submitting the specific dates of travel, the business destination, and a clear statement on the business purpose of the trip.

While employees using per diem rates do not need to submit receipts for every meal, they must complete the report with the required trip details. To ensure payments remain non-taxable, employees must account for their expenses within a “reasonable period of time.” The IRS provides safe harbor timeframes, such as substantiating expenses within 60 days and returning any excess advance within 120 days of the expense.

Receiving Your Per Diem Payment

Once an employee has submitted an approved expense report, the payment is issued. For per diem paid under a non-taxable accountable plan, the amount appears on the employee’s pay stub as a separate line item labeled “Per Diem” or “Travel Reimbursement.” It is listed as a non-wage payment and is not added to the gross income total subject to tax calculations.

In contrast, if the per diem is paid under a taxable non-accountable plan, the full amount is added to the employee’s gross wages for the pay period. This combined total is then used to calculate tax withholding.

The timing for receiving the payment is tied to the employer’s payroll schedule. After the expense report is approved, the payment is typically queued for the next available payroll cycle.