Federal per diem rates help simplify travel expenses for employees and employers alike. But how are those rates set and taxed? Here’s what you should know if your clients paid per diems to their employees or used them for their own travel-related business expenses.
What is per diem?
“Per Diems” are fixed amounts that are given or reimbursed to employees for business-related travel expenses. These rates may cover meals and incidentals, lodging, or both.
If you travel for business or have employees that do, it is essential to understand per diem. It simplifies managing travel expenses by eliminating the need for employees to submit detailed expense reports for every transaction. Instead, they receive a predetermined allowance that aligns with the cost of living in their destination. Agencies or companies typically set per diem rates, which can vary depending on the travel location’s cost of living and the nature of the trip.
Per diem coverage breakdown
Per diem covers a range of expenses. Generally, per diem rates are divided into two main categories: meals and incidentals (M&IE) and lodging. The rates are determined based on the geographical location and cost of living.
Meals and Incidentals
Expenses categorized as meals and incidentals cover all meals (breakfast, lunch, and dinner), room service, laundry, dry cleaning, and tips given to service providers who provide those related services. W2 employees are only eligible for 75 percent of the total M&IE rate on the first and last travel day. See the chart below for an M&IE budget breakdown.
M&IE breakdowns for the continental U.S.
| M&IE Total | Breakfast | Lunch | Dinner | Incidental Expenses | First & Last Day of Travel |
| $59 | $13 | $15 | $26 | $5 | $44.25 |
| $64 | $14 | $16 | $29 | $5 | $48.00 |
| $69 | $16 | $17 | $31 | $5 | $51.75 |
| $74 | $17 | $18 | $34 | $5 | $55.50 |
| $79 | $18 | $20 | $36 | $5 | $59.25 |
Lodging
The lodging category includes places that offer overnight stays, such as hotels, resorts, Airbnb, and apartments. The lodging per diem is a budgeted amount that is based on season and location of where the traveler is going. Ask your employer’s human resources or accounting department for specific rates.
Is per diem taxable?
For employees, per diems are not considered wages and, therefore, are not taxable. There are a few caveats to this. First, employees must submit an expense report that includes dates and location of the trip and the business purpose of the trip. Second, per diems must be within the allowable federal per diem rate set by the GSA; anything in excess of this amount is considered wages and is subject to taxes. (If employees are not reimbursed for their business travel expenses, they can claim them as a deduction on Form 2106 but only if they are itemizing deductions and if their expenses exceed 2% of their Adjusted Gross Income.)
Per diem rates by location
Per diem rates for the continental U.S. are set each year by the General Services Administration (GSA). For fiscal year 2024 (which began October 1, 2023), the standard rate is $166. Of that amount, $107 is for lodging and the remaining $59 is for meals and incidental expenses (M&IE). The GSA also sets rates for over 302 specific destinations where the cost of living tends to be higher than average.
Foreign per diem rates are established by the Department of State and are updated monthly. Per diem rates for travel in Hawaii, Alaska, and U.S. territories are set by the Department of Defense.
IRS per diem rates
Employers can also choose to use the IRS simplified “high-low” rates, which set one standard rate for areas with a higher cost of living (usually urban areas) and another lower rate for lower-cost areas. For 2024, these rates are ”$309 for travel [$235 lodging; $74 M&IE] to any high-cost locality and $214 [$150 lodging; $64 M&IE] for travel to any other locality” within the continental U.S. These rates are published in IRS Notice 2023-68. Most employers, however, choose to use the GSA rates. If you’re interested in more detailed rate information, consider attending one of the IRS Tax Forums.
Can employers deduct per diem?
Employers can deduct up to 50% of per diem spending for meals and incidentals. Lodging expenses are usually completely deductible as long as they are within per diem limits. Employers must retain records of the expense reports, but the per diem method usually simplifies their bookkeeping and deductions since they do not need to track every single expense of the trip.
For individuals that are self-employed, utilizing per diem for themselves is a bit trickier. They can’t use per diem lodging rates at all and must keep track of exact expenses instead. They can utilize the meal and incidental rates but, again, can only deduct 50% of the costs. ln most cases, using the actual expense method (i.e. keeping track of every receipt for the trip instead of utilizing per diem rates) involves the same amount of paperwork for business owners as they don’t have to provide receipts for meals that are less than $75 anyway.
In short, per diems are a great way to simplify travel expenses and bookkeeping for most businesses and employees. For business owners and sole proprietors, however, the actual expense method is usually just as simple as the per diem method – something you may consider for your own business-related travel!
Final thoughts on per diem
Per diem rates are a simplified way to handle expenses for a business trip. This includes spending on places to stay, food, and small things you might need along the way. Using per diem rates can save money and make things less complicated for both employers and their employees. These rates are set by groups like the GSA and IRS, and knowing about them helps business owners follow the rules and save on taxes. As business trips keep changing, it’s good to keep up with the latest on per diem rates to manage your money well.
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