Per Diem and Per Diem Tax Rates: Everything You Need to Know

A comprehensive guide to per diem payments and how they affect your taxes

If you travel for work, you may have heard of per diem payments. Per diem is a Latin phrase that means “for each day”. It refers to the amount of money that an employer pays an employee to cover their expenses while they are away from their home office. Per diem payments can cover meals, lodging, transportation, and other incidental costs. But how do per diem payments work? And how do they affect your taxes? In this post, we will answer these questions and more. We will explain what per diem is, what it covers, how it works, and how to calculate it. We will also discuss the different types of per diem payments, the benefits of per diem payments, and the per diem rates for 2024. Finally, we will answer some frequently asked questions about per diem and per diem tax rates. Let’s get started!

What is Per Diem?

Per diem is a fixed amount of money that an employer pays an employee to cover their expenses while they are traveling for work. Per diem payments are not part of the employee’s regular salary or wages. They are meant to reimburse the employee for the additional costs of traveling, such as meals, lodging, transportation, and other incidental expenses. Per diem payments are usually based on the location and duration of the employee’s travel. The IRS publishes per diem rates for different destinations and time periods, which employers can use as a guideline. Alternatively, employers can use their own per diem rates, as long as they are reasonable and documented.

What Does Per Diem Cover?

Per diem payments can cover two types of expenses: meals and incidental expenses (M&IE) and lodging expenses. Let’s take a look at each of these categories in more detail.

Meals and Incidental Expenses (M&IE)

Meals and incidental expenses (M&IE) include the costs of food, beverages, tips, taxes, and fees related to meals. They also include other incidental costs, such as laundry, dry cleaning, phone calls, and internet access. The IRS provides a standard M&IE rate for each destination, which varies depending on the cost of living in that area. For example, the M&IE rate for New York City is $76 per day, while the M&IE rate for Omaha, Nebraska is $61 per day. The M&IE rate also depends on the time of the year, as some destinations have higher or lower costs during certain seasons. For example, the M&IE rate for Orlando, Florida is $66 per day from January to March, but $71 per day from April to December. You can find the M&IE rates for different destinations and time periods on the IRS website.

Lodging Expenses

Lodging expenses include the costs of hotel rooms, motels, inns, or other accommodations where the employee stays overnight. The IRS also provides a standard lodging rate for each destination, which varies depending on the availability and quality of lodging in that area. For example, the lodging rate for San Francisco, California is $299 per night, while the lodging rate for Boise, Idaho is $96 per night. The lodging rate also depends on the time of the year, as some destinations have higher or lower demand for lodging during certain seasons. For example, the lodging rate for Aspen, Colorado is $422 per night from December to March, but $181 per night from April to November. You can find the lodging rates for different destinations and time periods on the IRS website.

How Does Per Diem Work?

Per diem payments are usually paid to the employee in advance or as a reimbursement after the travel is completed. The employee does not have to keep receipts or track their actual expenses, as long as they follow the rules and limits set by the employer and the IRS. However, the employee must still report their travel dates, destinations, and business purposes to the employer. The employer must also keep records of the per diem payments and the travel information for tax purposes.

Per Diem for Government Employees

If you are a federal, state, or local government employee, you may be eligible for per diem payments when you travel for work. The General Services Administration (GSA) sets the per diem rates for government employees, which are based on the IRS rates. The GSA rates are updated annually and can be found on the GSA website. Government employees must follow the policies and procedures of their agencies when claiming per diem payments. They must also submit travel vouchers and supporting documents to their agencies for approval and reimbursement.

Per Diem for the Self-Employed

If you are self-employed, you may also be able to claim per diem payments when you travel for business. However, you can only claim per diem for your meals and incidental expenses, not for your lodging expenses. You must also use the IRS rates, not the GSA rates, for your per diem payments. You can deduct your per diem payments as a business expense on your tax return, as long as you meet the following requirements:

You are traveling away from your tax home, which is your regular place of business or work.
Your travel is ordinary and necessary for your business or profession.
Your travel is for a period of one year or less.
You can substantiate your travel dates, destinations, and business purposes.

You can find more information about per diem for the self-employed on the IRS website.

Per Diem Rates for 2024

The IRS and the GSA update their per diem rates every year, usually in October. The per diem rates for 2024 have not been released yet, but you can expect them to be similar to the rates for 2023, with some adjustments for inflation and market changes. You can check the IRS and the GSA websites for the latest per diem rates and updates.

Types of Per Diem Payments

There are three types of per diem payments that employers can use to reimburse their employees for their travel expenses: fixed rates, partial payments, and out-of-pocket expenses. Let’s take a look at each of these types in more detail.

Fixed Rates

Fixed rates are the most common type of per diem payments. They are based on the standard rates set by the IRS or the GSA for each destination and time period. The employer pays the employee the full amount of the per diem rate for each day of travel, regardless of the actual expenses incurred by the employee. For example, if the per diem rate for Chicago, Illinois is $251 per day ($201 for lodging and $50 for M&IE), the employer pays the employee $251 for each day of travel to Chicago, even if the employee spends more or less than that amount.

Partial Payments

Partial payments are a type of per diem payments that are less than the full amount of the standard rates. The employer pays the employee a percentage or a fraction of the per diem rate for each day of travel, depending on the employer’s policy or agreement with the employee. For example, if the per diem rate for Dallas, Texas is $179 per day ($129 for lodging and $50 for M&IE), the employer may pay the employee 75% of the per diem rate, which is $134.25 per day ($96.75 for lodging and $37.50 for M&IE).

Out-of-Pocket Expenses

Out-of-pocket expenses are a type of per diem payments that are based on the actual expenses incurred by the employee, rather than the standard rates. The employer pays the employee the exact amount of the expenses that the employee reports, as long as they are reasonable and documented. The employee must keep receipts or other proof of their expenses and submit them to the employer for reimbursement. For example, if the employee travels to Los Angeles, California and spends $250 for lodging and $75 for M&IE, the employer pays the employee $325 for that day of travel, as long as the employee provides the receipts for their expenses.

Benefits of Per Diem Payments

Per diem payments have several benefits for both employers and employees. Some of the benefits are:

They simplify the accounting and reporting process for travel expenses, as the employer and the employee do not have to keep track of every receipt or expense.
They reduce the administrative and paperwork burden for both parties, as they do not have to deal with complex calculations or reimbursements.
They provide certainty and consistency for both parties, as they know in advance how much they will pay or receive for each day of travel.
They offer flexibility and convenience for the employee, as they can choose how to spend their per diem payments according to their preferences and needs.
They may reduce the tax liability for both parties, as per diem payments are generally not taxable for the employee or deductible for the employer, as long as they follow the rules and limits set by the IRS.

How to Calculate Per Diem?

To calculate per diem, you need to know the following information:

The destination and duration of your travel.
The per diem rate for your destination and time period.
The type of per diem payment that your employer uses (fixed, partial, or out-of-pocket).
The rules and limits set by the IRS and your employer for per diem payments.

Once you have this information, you can use the following steps to calculate per diem:

Find the per diem rate for your destination and time period on the IRS or the GSA website.
Divide the per diem rate into two components: lodging and M&IE.
Multiply the lodging component by the number of nights that you stay in your destination.
Multiply the M&IE component by the number of days that you travel, including the first and the last day.
Add the lodging and the M&IE components to get the total per diem amount for your trip.
Apply the type of per diem payment that your employer uses (fixed, partial, or out-of-pocket) to get the final per diem amount that you will receive or pay.

For example, suppose you travel to Boston, Massachusetts for 5 days and 4 nights in January 2024. The per diem rate for Boston in January 2024 is $284 per day ($234 for lodging and $50 for M&IE). Your employer uses fixed rates for per diem payments. To calculate your per diem, you would do the following:

Find the per diem rate for Boston in January 2024 on the IRS or the GSA website. It is $284 per day ($234 for lodging and $50 for M&IE).
Divide the per diem rate into two components: lodging and M&IE. It is $234 for lodging and $50 for M&IE.
Multiply the lodging component by the number of nights that you stay in Boston. It is $234 x 4 = $936.
Multiply the M&IE component by the number of days that you travel, including the first and the last day. It is $50 x 5 = $250.
Add the lodging and the M&IE components to get the total per diem amount for your trip. It is $936 + $250 = $1,186.
Apply the type of per diem payment that your employer uses (fixed rates) to get the final per diem amount that you will receive. It is $1,186.

Therefore, your per diem for your trip to Boston is $1,186, which your employer will pay you in advance or as a reimbursement after your travel is completed.

Final Words

Per diem payments are a convenient and beneficial way to cover your travel expenses when you travel for work. They can save you time, money, and hassle, as long as you follow the rules and limits set by the IRS and your employer. However, per diem payments can also be confusing and complicated, especially if you travel to different destinations and time periods, or if your employer uses different types of per diem payments. That’s why it’s important to understand how per diem works, what it covers, and how to calculate it. We hope that this post has helped you learn more about per diem and per diem tax rates, and that you can use this information to make the most of your per diem payments. If you have any questions or comments, feel free to leave them below. We would love to hear from you!

FAQs

Here are some of the most frequently asked questions about per diem and per diem tax rates, along with their answers.

1. Why do companies pay per diem tax?

Companies pay per diem tax to comply with the IRS rules and regulations for per diem payments. Per diem tax is the amount of tax that the employer has to withhold from the employee’s per diem payments, if the payments exceed the IRS limits or are not properly substantiated. Per diem tax is calculated based on the employee’s income tax rate and the excess or unsubstantiated amount of the per diem payments. Per diem tax is reported on the employee’s W-2 form and the employer’s 941 form.

2. Is per diem reported to the IRS?

Per diem is reported to the IRS by both the employer and the employee, depending on the type and amount of the per diem payments. The employer has to report the per diem payments on the employee’s W-2 form, either as taxable or nontaxable income, depending on whether the payments meet the IRS rules and limits. The employer also has to report the per diem tax, if any, on the employee’s W-2 form and the employer’s 941 form. The employee has to report the per diem payments on their tax return, either as income or as a deduction, depending on whether the payments are taxable or nontaxable, and whether the employee is an employee or a self-employed individual.

3. Is per diem paid out on weekends?

Per diem is paid out on weekends, as long as the employee is traveling for work and away from their tax home. However, the employee may not be eligible for the full amount of the per diem rate on weekends, depending on the employer’s policy or agreement with the employee. For example, some employers may pay a reduced per diem rate on weekends, or only pay for the M&IE component, not the lodging component, on weekends. The employee should check with their employer before traveling to find out the exact per diem payment for weekends.

4. Is per diem taxable?

Per diem is taxable, if the payments exceed the IRS limits or are not properly substantiated. The IRS limits are the standard rates that the IRS publishes for different destinations and time periods. The substantiation requirements are the rules that the employee and the employer have to follow to prove that the per diem payments are for business travel expenses. If the per diem payments are within the IRS limits and are properly substantiated, they are not taxable for the employee or deductible for the employer. However, if the per diem payments are above the IRS limits or are not properly substantiated, they are taxable for the employee and deductible for the employer. The employee has to report the taxable portion of the per diem payments as income on their tax return, and the employer has to withhold and report the per diem tax on the employee’s W-2 form and the employer’s 941 form.

5. Can employers deduct per diem?

Employers can deduct per diem, if the payments are above the IRS limits or are not properly substantiated. The IRS limits are the standard rates that the IRS publishes for different destinations and time periods. The substantiation requirements are the rules that the employee and the employer have to follow to prove that the per diem payments are for business travel expenses. If the per diem payments are within the IRS limits and are properly substantiated, they are not taxable for the employee or deductible for the employer. However, if the per diem payments are above the IRS limits or are not properly substantiated, they are taxable for the employee and deductible for the employer. The employer has to report the deductible portion of the per diem payments as an expense on their tax return, and withhold and report the per diem tax on the employee’s W-2 form and the employer’s 941 form.

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