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.
Per diem rates
Per diem rates for the continental U.S. are set each year by the General Services Administration (GSA). For fiscal year 2022 (which begins October 1, 2021), the standard rate is $59 for meals and incidentals and $96 for lodging. The GSA also sets rates for over 319 specific destinations where the cost of living tends to be higher than average.
Foregin 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. These rates are published in IRS Notice 2021-52. Most employers, however, choose to use the GSA 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.)
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 sole-proprietors and business owners, 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!
This article is up to date for tax year 2021 (returns filed in 2022).