Is Travel Per Diem Taxable and How Is It Reported?

Travel per diem refers to a daily allowance employers provide to employees to cover business travel expenses. These expenses typically include lodging, meals, and incidental costs incurred while an employee is away from their regular place of work. The tax treatment of per diem payments is not always straightforward, as it depends on specific Internal Revenue Service (IRS) regulations and how an employer administers these allowances. Understanding these rules is important for both employers and employees to ensure proper tax compliance.

Understanding Per Diem Taxability

The taxability of per diem payments largely depends on whether they are issued under an “accountable plan” or a “non-accountable plan,” as defined by the IRS. This distinction is fundamental to determining if the per diem is considered taxable income to the employee. An accountable plan ensures that per diem payments are generally not included in an employee’s gross income and are therefore non-taxable.

To qualify as an accountable plan, specific IRS rules must be met, ensuring the payments are directly related to business expenses. Consequently, these amounts are not reported as wages on an employee’s Form W-2. For the employee, this means the per diem does not increase their taxable income.

Conversely, a non-accountable plan treats all per diem payments as taxable wages. This occurs when an employer’s reimbursement arrangement does not satisfy the IRS’s requirements for an accountable plan. Payments received under a non-accountable plan are fully subject to federal income tax, Social Security, and Medicare taxes.

Employers must include these amounts in the employee’s gross wages reported on Form W-2. The absence of specific substantiation or return of excess funds often leads to a plan being classified as non-accountable.

Requirements for Non-Taxable Per Diem

For per diem payments to remain non-taxable to the employee, an employer’s reimbursement arrangement must consistently meet three specific IRS requirements, forming what is known as an “accountable plan.” First, there must be a clear business connection for the expenses being reimbursed. This means the per diem must be provided for expenses incurred while the employee is performing services for the employer, such as travel away from home for business purposes. The expenses must be ordinary and necessary for the employer’s business.

Second, employees must adequately substantiate their expenses within a reasonable period. Substantiation requires providing the employer with detailed records, such as receipts, that show the amount, time, place, and business purpose of each expense. A reasonable period for substantiation is typically within 60 days after the expenses were paid or incurred.

Third, employees must return any excess per diem received that is not substantiated or that exceeds the substantiated expenses. This return of excess funds must also occur within a reasonable period, generally considered to be within 120 days after the expenses were paid or incurred.

Employers can simplify the substantiation process for lodging, meal, and incidental expenses by utilizing the IRS “high-low” per diem method. This method allows for a set daily rate based on the travel location, rather than requiring detailed receipts for every expense. For the period of October 1, 2024, through September 30, 2025, the high-cost locality rate is $319 per day, while the low-cost locality rate is $225 per day. The meal and incidental expenses (M&IE) portion of these rates is $86 for high-cost localities and $74 for low-cost localities.

Even when using the high-low method, the requirements for business connection and the return of excess per diem remain in effect. This simplified method is outlined in IRS guidance, which updates the specific rates and high-cost localities.

Reporting Taxable Per Diem

When per diem payments do not meet the criteria for an accountable plan, they become taxable income to the employee. Employers are responsible for correctly reporting these taxable amounts on the employee’s Form W-2, Wage and Tax Statement. These amounts are generally included in Box 1, “Wages, tips, other compensation,” which represents the total taxable earnings for federal income tax purposes.

In addition to federal income tax wages, taxable per diem is also subject to Social Security and Medicare taxes. Therefore, these amounts are included in Box 3, “Social security wages,” and Box 5, “Medicare wages,” on the Form W-2. The employer must also withhold the appropriate federal income tax, Social Security tax, and Medicare tax from these payments, just as they would for regular wages.

A significant change affecting employees occurred with the Tax Cuts and Jobs Act (TCJA) of 2017. Before this act, employees could potentially deduct unreimbursed employee business expenses as miscellaneous itemized deductions on their federal income tax returns, subject to a 2% adjusted gross income floor. However, the TCJA suspended these deductions for tax years 2018 through 2025.

This means that if an employee receives per diem under a non-accountable plan, or if they do not return excess per diem, the taxable portion included in their W-2 wages is generally no longer deductible on their individual federal income tax return. This temporary suspension underscores the importance of employers maintaining an accountable plan to prevent per diem from becoming taxable wages for their employees.