How to Claim Per Diem on Taxes for Work-Related Travel

Per diem allowances are a key consideration for taxpayers who frequently travel for work, as they streamline the process of claiming expenses for meals and incidentals. Understanding how to claim per diem on taxes effectively can reduce taxable income and lead to savings.

Qualifying Work-Related Travel

To claim per diem, it’s important to know what qualifies as work-related travel. The IRS defines this as travel requiring an individual to be away from their tax home for longer than a typical workday, necessitating sleep or rest. For example, an overnight business trip qualifies, but a same-day trip without an overnight stay does not.

A “tax home” refers to the city or area where an individual’s primary place of business is located, regardless of where they live. Expenses incurred within the vicinity of one’s tax home are not deductible. For instance, if a consultant’s primary office is in New York City but they reside in New Jersey, their tax home is New York City. Only travel outside this area qualifies for per diem claims.

The trip must primarily serve a business purpose, meaning it must be directly connected to the taxpayer’s trade or profession. Personal travel, even if taken during a business trip, does not qualify. For instance, if a salesperson attends a conference in Los Angeles and extends their stay for personal reasons, only the expenses related to the conference are eligible for per diem.

Standard Rates vs Actual Expenses

Taxpayers choosing to claim per diem must decide between standard rates and actual expenses. The General Services Administration (GSA) sets per diem rates annually for different locations, covering lodging, meals, and incidentals. These rates vary by geographic area, with cities like New York typically having higher rates than less expensive areas.

Using standard rates simplifies reporting, as there’s no need to track every individual expense. Taxpayers can rely on the GSA rates, which the IRS accepts as reasonable estimates. However, this method limits deductions to the set rates, even if actual expenses are higher.

Claiming actual expenses requires detailed documentation but can be advantageous if costs exceed standard rates. Taxpayers must keep all receipts and maintain a log of expenditures. For example, higher lodging costs during a major event in San Francisco could justify claiming actual expenses instead of the standard rate.

Substantiating Meals and Incidentals

Proper documentation is essential when claiming per diem, particularly for actual expenses. The IRS requires detailed records to support claims, including itemized receipts that show the date, location, purpose of the expense, and any business-related participants. For example, a meal receipt should clearly indicate all relevant details to establish its business connection.

A system for tracking expenses is critical given the IRS’s strict substantiation requirements. While credit card statements can supplement records, they are insufficient on their own. Taxpayers should maintain a travel log noting each trip’s purpose to further substantiate claims. Digital tools, such as expense-tracking apps, can simplify this process by organizing and categorizing expenses in real time.

Tax Forms and Filing Requirements

Employees typically find per diem allowances reported on Form W-2, where amounts within IRS-approved rates are not taxed. However, reimbursements exceeding these rates are treated as income and must be reported.

Self-employed individuals report per diem expenses on Schedule C (Form 1040) as business deductions. These deductions must align with IRS guidelines to avoid scrutiny. Supporting details are often included on Form 2106, Employee Business Expenses, to substantiate claims.

Employer Reimbursement vs Self-Employed

The treatment of per diem depends on whether an individual is an employee receiving employer reimbursement or self-employed. Employees are often reimbursed under an accountable plan, which requires substantiation of expenses and the return of any excess reimbursement. Reimbursements within IRS-approved rates are not taxable. For example, if an employer reimburses $74 per day for meals and incidentals in a city with that exact per diem rate, the amount is not included in the employee’s taxable income.

Self-employed individuals, on the other hand, claim per diem as deductions on their tax returns without employer reimbursement. This requires strict adherence to IRS guidelines for rates and documentation. For example, a freelance consultant traveling to an expensive area like San Francisco must document the trip’s dates, locations, and business purposes to claim the deduction. Understanding these distinctions is essential to ensure compliance and maximize deductions.