What Is Per Diem, and How Is It Taxed?

If your employees routinely travel for business, you’ll have to cover their trip expenses, including lodging and meals.

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One way to cover these business expenses is by reimbursing employees after every trip. While this sounds simple, you'll have to remember to verify and keep each receipt and create an expense report for the IRS.  

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An easier option? You can give your employees a fixed amount of money per day, aka per diem allowance. When you pay per diem allowance, you don’t need to keep detailed receipts—only an expense report is enough for tax purposes.

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But what, exactly, counts as a per diem expense? And are they taxable? We’ll answer all your questions burning questions in this guide, so let’s get started!

What Is a Per Diem Expense?

Per diem in Latin means "by the day" or "for each day." When businesses say they “pay per diem expenses,” they’re paying a fixed amount to their employees to cover their travel expenses for each day they’re gone. 

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Here's a quick rundown of the expenses per diem covers:

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• Lodging: Per diem for lodging covers room rents for hotels, motels, inns, resorts, and apartments. 
• Meals: Per diem covers the food and beverages (excluding alcohol) your employees buy during their travels. 
• Incidental expenses: Per diem covers expenses such as room service, laundry, dry cleaning, and ironing. It also includes tips and fees for workers who provide your employees with services, such as food servers and luggage handlers. 

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Here, meals and incidental expenses are generally coupled under an umbrella term of M&IE. 

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Note that the per diem allowance doesn't cover transportation expenses, like airline tickets. 

Is Per Diem Tax Deductible for Employers?

Yes, most of the per diem you pay your employers is tax deductible. For instance, employees’ lodging expenses are 100% tax deductible if they’re within the federal per diem rate. And the IRS has given a 100% tax relief for restaurant meals until Dec. 31, 2022, due to the pandemic—before that, it was 50%. In 2023, restaurant meals will return to being 50% deductible.

Do Employers Report Per Diem to the IRS?

As an employer, you have to report how much per diem you paid your employees in your tax returns. 

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And you can write off some of those per diem expenses to reduce your taxes: 

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• Lodging: Lodging expenses are fully tax deductible if you pay equal to or less than the federal rate (more on that below).
• Meals: The Taxpayer Certainty and Disaster Relief Act of 2020 provides 100% tax relief for expenses on food and beverages from restaurants up until Dec. 31, 2022—before that, it was 50%. For meals bought from grocery stores, vending machines, and kiosks, the deduction allowed is still 50%. 
• Incidental expenses: Incidental expenses below $5 per day for an employee are deductible. 

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However, make sure you have the employees' expense reports to support these tax deduction claims.

Is Employee Per Diem Taxable?

If an employer pays the federal per diem rate or less, per diem isn’t taxable for employees. 

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However, if an employer pays a per diem allowance higher than the federal rate, the excess will be treated as employee wages, which will be subject to income tax. 

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Also, the employee has to fill out an expense report within 60 days of the trip, containing the trip's date and place and details about the business purpose for traveling. 

How Much Per Diem Should You Pay Your Employees?

You can pay the standard rates set by the General Services Administration (GSA) or Internal Revenue Service (IRS)—it’s up to you. If you want a county-specific per diem rate, you may want to pay your employees the GSA rates. But, if you are looking for a simplified reimbursement method, follow the IRS guidelines.

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Let’s take a close look at both federal rates. 

IRS High-Low Per Diem Method

The IRS defines per diem rates based on the travel location. You have to pay a higher per diem rate for some locations within the continental United States (CONUS) and a lower rate for the other locations. Here, the continental United States doesn’t include Alaska, Hawaii, Puerto Rico, and U.S. possessions. 

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Every fiscal year, the IRS defines a combined per diem rate for lodging and meals and incidentals. 

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The high-low per diem rates as of Oct. 1, 2022 are:

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• $297 for travel to any locality with a high cost of living.
• $204 for travel to any other locality with a low cost of living.

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The meal expenses (included in the above amount) shouldn’t be more than $74 for high-cost U.S. territories and $64 for low-cost territories. Also, the incidental costs should stay within $5 per day. 

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The IRS doesn't define specific rates for lodging. However, if you pay employees less than the IRS rate, a good practice is to allocate 40% of the combined amount to meals and 60% to lodging.

GSA Federal Per Diem Rate Method

Follow the GSA rates if you want to pay for lodging and meals and incidentals separately. Remember, you may need to pay different rates for the standard continental U.S. territories (~2,600 counties) and non-standard (316 counties) territories. 

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Here are the GSA’s per diem rates for the standard continental U.S. territories (for the financial year 2023, which started on Oct. 1, 2022):

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• Lodging: $98 per day.
• Meals and incidental expenses: $59 per day.

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You can use the GSA’s online tool to look up the exact rates for every city.

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For regions outside the U.S., check out the rates listed by the State Department. For non-foreign areas that aren’t in the continental U.S. (e.g., Alaska, Guam, and Hawaii), you can follow the rates set by the Department of Defense. 

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An important thing to note is that these rates are just guidelines. You can pay rates lower or higher than federal rates. But if you decide to go higher, the IRS will consider the extra amount as employee wages, and the excess will be taxable to the employee. 

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Paying Per Diem for Travel Expenses is the Easiest Option

As a business owner, you'll frequently have to pay for your employees’ business travel expenses. Per diem payments help simplify expense bookkeeping and reduce taxes if they’re within the federal rates. 

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If you don’t want to follow the per diem method, you can reimburse the exact expenses of your employees, though that can be a hassle since you need to verify, record and save every receipt. 

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Another alternative is to give your employee a company credit card for travel expenses. Still, the employee will need to submit the details of each expense along with their receipts. Ultimately, per diem is the easiest route to go.

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One last thing worth noting is that the IRS and GSA update their rates for per diem payments every fiscal year. So be sure to stay up to date to comply with tax laws! And now that you know all there is to know about per diem rates, all that’s left to do? Start setting your budget!