Per Diem is the allowance given to an employee for travel expenses and meals incurred due to a
business trip. Businesses offer per diem to employees traveling so that the employee is not
responsible for expenses occurred from the trip. Although a per diem is technically a payment to that
employee, it is more like an advance or a reimbursement and is not considered in annual wages or the
employee’s W-2. Per diem can be used for expenses such as melas, room service, laundry/dry
cleaning, and fees for services such as luggage handlers.
One thing that is important to note is that per diem covers different items depending on the set-up of
the business. An employer can apply a per diem rate to the combined costs of meals and lodging. A
self-employed individual, however, can only apply a per diem rate to the cost of meals. Second, per
diem is not usually taxable. On occasion, however, certain situations cause a per diem payment to
become taxable. If the employee receiving a per diem payment does not file an expense report with
their employer or if the expense report filed does not include details such as date or amount and the
employee still receives the payment, this payment would become taxable because there would be no
documentation to qualify the payment as per diem. Additionally, if the per diem payment is made in
an amount larger than the federal per diem rate, the additional funds paid would be considered
taxable.
I would advise my client that if they needed help with per diem moving forward, to look up the IRS
Per Diem Rate FAQ. This page can be found on the IRS Per Diem Rate page, and explains the
answers to frequently asked questions regarding per diem expenses, rates, and situations. The FAQ
page is not specific tax code, however, it explains per diem in a way that is simplified and easy to
understand, even if the individual does not work with taxes or travel expenses regularly.
Per diem can be defined as an allowance given to employees by an employer for lodging, meals, and
incidental expenses an employee incurs while traveling for business purposes. Some businesses
choose per diem payments instead of paying an employee actual travel expenses because it simplifies
record keeping for employers and no payroll deductions or taxes are taken out of it. In addition, an
employer is allowed a deduction for such expenses if the expenses are ordinary and necessary
expenses as stated in section 162 (a).
Per diem rates are typically not taxable to employees. For per diem payments to be tax free, payments
must be less than or equal to the federal per diem rate. The federal per diem rates can be found under
publication 1542. Any per diem amounts paid in excess of the federal per diem rates would be
considered taxable. Lastly, employees must be able to substantiate their expenses by submitting an
expense report as per section 274 (d). The expense report must include the following information:
Business purpose of trip,
Date, time, and place of trip,
Amount of expenses
Employees must also remember to submit their expense report within a reasonable time. A reasonable
period is considered 60 days or less. If the above conditions are not met, these payments become
taxable to the employee.
One aspect of the rules that might be misunderstood is the substantiation requirement described
above. Under section 274 (d), a taxpayer must substantiate such expenses through adequate records or
sufficient evidence. Employees may not properly include all the required information on their
expense reports or even forget to submit them on time resulting in the per diem expenses being
taxable.
Another aspect of the rules that might be misunderstood may occur when per diem rules change. One
such example is the changes that occurred under the Consolidated Appropriation Act of 2021. Before
2021, qualifying meal expenses were only 50 % deductible. Lodging expenses on the other hand were
100% deductible. The Consolidated Appropriation Act raised the deductibility for meal expenses to
100% for the periods 2021 and 2022. It can be difficult for businesses to stay up to date with such
changes.
I would advise the client of the per diem rules by explaining the rules in a clear and simple manner to
ensure that they understand the rules going forward. I would begin by explaining what per diem is
and how someone may obtain federal per diem rates as well as the implications to employees for
exceeding these per diem rates. Lastly, I would explain the substantiation requirements needed to
allow these payments to be tax free to their employers.
References:
Notice 2021-52 1. Purpose
IRS. Per Diem Rate Frequently Asked Questions.
https://www.irs.gov/pub/irsregs/per_diem_faq_%26_a_v1.pdf
