Per Diem Tax Rules for Business Travel
Understand the connection between reimbursement policy and tax law to ensure your company's per diem payments remain non-taxable income for employees.
Per diem is a fixed daily allowance an organization provides to an individual for travel-related expenses, including lodging, meals, and incidental costs. The purpose of a per diem system is to streamline expense reimbursement, removing the need for employees to submit receipts for every purchase. Instead of tracking actual costs, the employee receives a set daily rate based on the travel destination. This method simplifies expense management for both the employee and the employer and helps companies budget for travel costs.
Conditions for Non-Taxable Per Diem
For per diem payments to be excluded from an employee’s taxable income, they must be provided under an “accountable plan” as defined by the Internal Revenue Service (IRS). If the plan meets these standards, the money received by the employee is not considered wages and is not subject to income or payroll taxes.
An accountable plan must satisfy three core requirements:
- A business connection, which mandates that the expenses must be incurred for legitimate company purposes while the employee is traveling away from their tax home.
- Substantiation, meaning the employee must adequately account for their travel expenses to the employer by providing a record of the time, place, and business purpose.
- A requirement that an employee must return any per diem amount that exceeds the substantiated federal limits within a reasonable period.
If a reimbursement arrangement fails to meet any of these three conditions, it is classified as a “non-accountable plan.” Under such a plan, all per diem payments are considered taxable wages and must be included in the employee’s gross income.
Federal Per Diem Rates
The federal government establishes the monetary rates for per diem payments, which serve as the benchmark for non-taxable reimbursements. The U.S. General Services Administration (GSA) sets the standard rates for lodging, as well as for meals and incidental expenses (M&IE), for most destinations within the continental United States (CONUS). For the 2025 fiscal year, the standard CONUS rate is $178, which breaks down into $110 for lodging and $68 for M&IE. The GSA also identifies 296 specific locations as non-standard areas (NSAs), which are assigned higher per diem rates.
Different government bodies manage rates for travel outside of the lower 48 states. The Department of Defense sets the per diem rates for travel to Alaska, Hawaii, and U.S. territories (OCONUS). For international travel, the Department of State determines the foreign per diem rates.
As an alternative to using location-specific rates, employers can use the “high-low substantiation method.” This simplified approach establishes two rates: one for designated high-cost localities and one for all other localities within CONUS. For the 2025 fiscal year, the high-cost area rate is $319 per day, while the low-cost area rate is $225 per day.
The M&IE portion of the per diem rate covers a range of expenses, including:
- Breakfast, lunch, and dinner
- Room service and tips for food service staff
- Fees and tips for porters, baggage carriers, and hotel staff
On the first and last days of travel, the M&IE reimbursement is calculated at 75% of the standard daily rate. The GSA website provides a lookup tool to find the specific per diem rates for any destination.
Recordkeeping and Substantiation Requirements
To comply with an accountable plan, an employee must substantiate the details of their business travel, even when using per diem rates. This recordkeeping is required for the per diem payments to remain non-taxable. The focus is not on the amount spent, but on proving the travel was for legitimate business reasons.
The information that must be documented for each trip includes the date and time of the travel, the destination, and the specific business purpose. For example, an employee would need to record that they traveled to a particular city from June 10th to June 12th to attend a specific client meeting or industry conference.
A benefit of the per diem method is that employees are not required to keep receipts for their meal and lodging expenses, as the federal rate substantiates the amount. However, this does not eliminate the need to document the trip’s core details in a log or report that verifies the when, where, and why of the travel.
Tax Reporting for Employees
The tax reporting for per diem payments depends on whether they were paid under an accountable plan and if they exceeded federal limits. If an employer provides per diem under an accountable plan and the amount does not exceed federal rates, the payments are non-taxable. This money will not be included in the employee’s taxable wages in Box 1 of their Form W-2.
If payments are made through a non-accountable plan, the entire amount is taxable income and included in Box 1 of the W-2. If payments under an accountable plan exceed federal limits and the employee does not return the excess, that excess amount is also treated as taxable wages. The non-taxable portion of the per diem is reported in Box 12 of Form W-2 with code “L”.