What Is Per Diem?
"Per diem" or day rate is a fixed amount of reimbursement paid to employees for daily lodging, meals, and incidental expenses incurred during business-related travel. The rates are set each year by the General Services Administration (GSA) for destinations within the Continental U.S.; non-foreign rates (e.g., Alaska, Hawaii, Puerto Rico, and Guam) are set by the Department of Defense and foreign rates (anywhere outside the U.S. and its territories) are established by the State Department.
If you travel for business or have employees who travel, it is important to understand per diem, which offers an alternative to reimbursement based on detailed expense records and requires less elaborate bookkeeping. Here, we answer questions you might have about per diem, how it works and, what it involves tax-wise.
- Per diem is a fixed dollar amount established to reimburse employees for various types of charges.
- Per diem rates can be tied to daily lodging, meals, miles driven, or incidental expenses.
- Per diem rates for meals and lodging are based on geographical location.
- Per diem rates for mileage is set by the IRs; for 2023, the mileage rate is $0.655 per mile.
- Companies may prefer per diem for its simplicity and equity, though it often results in the company overcompensating or undercompensating employees.
What Does Per Diem Cover?
The GSA breaks down per diem rates into two categories: meals/incidental expense (M&IE) and lodging.
Meals and Incidental Expenses
The meals and incidental expenses (M&IE) category covers all meals (breakfast, lunch, and dinner), room service, laundry, dry cleaning, pressing of clothing, and fees and tips for the people who provide services, such as food servers and luggage carriers.
Major cities typically have the maximum per diem tier of $79 per day; smaller cities that host substantial business-related travel have per diems that fall between lower tiers ($59 to $74). These daily expenses are segmented into breakfast, lunch, dinner, and incidental expenses.
|Per Diem Rates, 2023|
The lodging category covers accommodations for overnight stays, such as hotels, motels, inns, resorts, and apartments. A separate per diem rate is set for both M&IE and lodging for each location. For example, for the 2023 fiscal year, the per diem rates for Atlanta is $163 for lodging and $74 for M&IE. For Chicago, lodging rates range between $187 and $218, depending on the month, and the M&IE per diem is $79.
The GSA stipulates different rates for the first and last day of travel. Though the full per diem for meals for a Tier 1 location is $59, the starting and ending daily rate is $44.25. For a Tier 5 location, only $59.25 can be claimed (as opposed to maximum $79).
Per Diem Rates by Location
Per diem rates are based on an area's cost of living. Per diem rates in large cities, such as Chicago, New York, and Los Angeles are higher than non-metropolitan areas because goods and services in larger cities are generally more expensive. Lodging rates can also vary by month in response to supply and demand. The highest lodging per diem in New York City, for example, coincides with autumn, the season that attracts the most tourists and business travelers. Per diem rates are updated annually and become effective Oct. 1, the first day of the federal government’s fiscal year.
Finding Rates for Each Location
Ask your employer's Human Resources or Accounting department for specific rates, or look up the information by visiting the GSA website, where you can search by city, state, or zip code for the current fiscal year (Oct. 1 through Sept. 30). If you want to view the next fiscal year or any other year since 1997, search by state and select the appropriate year from the drop-down menu. Click "Find per diem rates" to view the results, which are broken down by primary destination, county, maximum lodging by month, and meals and incidental expenses (M&IE).
If you search for an area that isn't covered by GSA tables (e.g., Hawaii, which is not part of the Continental U.S.), two links will appear that will direct you to the appropriate website: the Department of Defense for non-foreign travel (Alaska, Hawaii, Puerto Rico, and Guam) and the State Department for all foreign destinations.
Employer Use of GSA Rates
While most businesses use the per diem rates set by the GSA, they can use alternative reimbursement methods. For example, employers can use the IRS high-low method, which establishes one flat rate per diem for high-cost locations (e.g., New York, Chicago, and the District of Columbia), and one flat rate for all other locations.
Employees are often expected to use the per diem rate to cover their expenses and to keep receipts for any expenses that exceed the per diem rate. In some cases, employees may be required to return any excess funds to the employer. Last, employers use GSA rates to help budget for travel; by understanding where certain employees may be traveling in the upcoming year, the company can forecast what their daily expenditure will be once the per diem rates are set early in the year.
Per Diem for Business Expenses (Mileage)
Per diem mileage rates for taxes are the rates established by the IRS that taxpayers can use to calculate deductible travel expenses for tax purposes. These rates are used to determine the standard mileage deduction that taxpayers can take for business-related travel using their personal vehicle.
For the tax year 2022, the IRS has established a standard mileage rate of 58.5 cents per mile for business miles driven. This rate was then increased midway through the year to 62.5 cents and was further increased 3 cents to 65.5 cents per mile driven in 2023.
The purpose behind this per diem mileage rate is to reimburse employees for costs incurred driving their personal vehicle for costs they are not otherwise reimbursed for. In addition, it may be unfeasible to calculate the exact amount of depreciation, gas use, oil use, and other overhead cost for every trip. Instead, eligible users can simply use the fixed rate for every eligible mile driven.
The 2023 standard mile rate for 2023 is $0.655 per mile.
Taxes on Per Diem Reimbursements
Per diem payments are not considered wages—and are therefore non-taxable—as long as they meet certain conditions. You will be subject to taxes if any of the following are true:
- Payment is more than the allowable federal per diem rate
- You did not file an expense report with your employer
- Your expense report did not include the date, time, place, amount, and business purpose of the expense
- Your employer gave you a per diem and didn't require an expense report.
If any of the above situations are true, your per diem will be considered wages and will be subject to income tax withholding and payroll taxes. The amount will be reported by your employer on your W-2 form. If it is just that your per diem was above the allowable federal per diem rate, only the excess amount will be considered wages.
To substantiate your travel and related expenses, you will be required to maintain a log that includes the days you traveled for business, where you went, and the business purpose of the trip. Note: if your business-related travel lasts longer than a year in one location—even if it involves two or more separate assignments—you may not be eligible for tax exemption under the per diem tax rules. To avoid unfavorable tax consequences, consult with your tax advisor before embarking on an extended business trip.
Per Diem As a Salary Alternative
Because per diem payments are non-taxable, some people may raise the question, "Can I accept a lower salary with per diem instead of a higher salary with no per diem?" The answer is "no." Per diem policies cannot be created in a manner that allows what should be waged to be labeled as something else—in this case, per diem.
This is because the intention of per diem is not additional compensation but for a reimbursement of expenditures. It's assumed that those traveling will need to eat multiple meals per day and spend money on incidentals while they are away from home. These expenses are not meant to incentivize a worker but rather ensure a safe, healthy standard of living can occur while traveling for work.
Per Diem vs. Stipend
Per diem refers to a daily allowance that an employer pays to an employee to cover their expenses while on a business trip or assignment. In a very similar manner, a stipend is a fixed amount of money that an employer pays to an employee. A stipend may be paid on a regular basis, such as monthly or weekly, or it may be a one-time payment for a specific project or assignment.
Stipends are often used in academic and research settings. They're usually paid to students or researchers to support their living expenses while they conduct their studies or research. Although both per diem and stipends may be used to cover living expenses, per diem is more commonly used for expenses away from a home. In addition, a stipend is often a less-rigidly calculated amount that simply awards a broad amount to be used for more generic purposes.
Advantages and Disadvantages of Per Diem
Pros of Per Diem
There's many reasons companies and individuals may prefer per diem over actual expense reimbursement. By using per diem rates, employers can establish a predictable travel budget and avoid unexpected expenses that may arise during business travel. This is especially true for travel set further into the future as per diem may be set for the entire upcoming year.
Per diem eliminates the need for employees to keep track of and submit receipts for individual expenses. This reduces the administrative burden on both the employee and employer. Because employees do not have to keep track of individual expenses, they can spend more time focused on their business objectives during the trip.
Also by using per diem rates, the tax reporting process for both the employee and employer can be simplified. Instead of potentially being in non-compliance with non-allowable actual expenses having been reimbursed, it is simply safer and more straightforward .
Per diem can be seen as a more equitable method of reimbursing employees for their travel expenses. Per diem eliminates the need for employees to pay out-of-pocket expenses and wait for reimbursement. In addition, all employees get reimbursed the same amount (assuming they are traveling to the same location).
Cons of Per Diem
Unfortunately, there's also plenty of reasons companies and employees would prefer getting reimbursed for actual costs incurred. First, per diem rates may not cover all expenses incurred during business travel. This means that employees may need to cover expenses out-of-pocket for anything not covered by per diem but still necessary for their trip.
Companies may not prefer per diem because rates are set based on the location of the business travel. Because the nature of each employee's travel will be different, companies risk overpaying or underpaying employees as actual costs incurred will rarely if ever be exactly the same as the per diem amount.
Though per diem rates simply and reduce risk in some areas, they increase risk in others. Employers must ensure that their per diem rates comply with tax regulations and are reasonable based on industry standards. Failure to do so could result in penalties or fines from tax authorities.
Creates more predictable travel budget
May reduce administrative burdens
May increase employee satisfaction due to simplicity and time savings
Promotes equity by reimbursing everyone the same amount (assuming travel to the same location)
May result in employees needing to pay for non-per diem expenses out of pocket
May put companies at risk if incorrect rates are paid
Often overpays or underpays employees as actuals likely do not exactly match rates
Is Per Diem a Salary?
No, per diem is a variable expense companies pay to employees for expenses incurred away from their home. It's usually only incurred when workers are traveling or on assignment. Per diem is not a fixed amount, especially considering that different geographical areas will have different per diem rates.
What Is the Maximum Per Diem Allowed?
The IRS will stipulate special per diem rates for travel or expenses incurred to high-cost areas. For example, the 2022-2023 special per diem rates included a maximum $297 for travel to high-cost localities.
Is Per Diem Reported to the IRS?
Per diem in excess of federally accepted per diem rates is treated as taxable income and is reported to the IRS as part of normal income reporting. Normal per diem paid under an accountable plan is not included in an employee's W-2.
Do I Need to Collect Receipts If I Receive Per Diem?
Consult your company's receipt policy to best understand whether receipts are required. In many cases, companies try to avoid requiring employees from maintaining receipts; instead, they agree to simply pay government-approved rates for meals and travel-related costs. By doing so, employees can simply focus on their travel-related work and not need to collect receipts.
Is Per Diem Paid Out on Weekends?
Again, it might be best to consult your company's specific policy around per diem. In general, companies often have policies in place to cover meals and lodging for days worked, even on weekends. It may be necessary for workers to attend a weekend conference; in this cases, per diem would be incurred over the weekend.
The Bottom Line
Per diem payments provide reimbursement to employees who travel for business purposes. Rates vary by location and time of year and are broken down into two categories: lodging and meals and incidental expenses (M&IE). As long as your payments do not exceed the maximum federal per diem rate, they are non-taxable; if per diem payments exceed federal limits, any excess will be taxed as ordinary income.
Per diem rates may change annually, and per diem tax laws can be complicated. Consult a qualified tax specialist if you have questions or concerns about your company's per diem policy.
U.S. General Services Administration. "Frequently Asked Questions, Per Diem."
U.S. General Services Administration. "Federal Travel Regulation, Section 300-3.1," Pages 22 and 71.
U.S. General Services Administration. "M&IE Breakdown."
U.S. General Services Administration. "Per Diem Rates for Georgia."
U.S. General Services Administration. "Per Diem Rates for Illinois."
U.S. General Services Administration. "Factors Influencing Lodging Rates."
U.S. General Services Administration. "FY 2020 Per Diem Rates for New York."
Internal Revenue Service. "IRS Issues Standard Mileage Rates for 2022."
Internal Revenue Service. "IRS Issues Standard Mileage Rates for 2023."
Internal Revenue Service. "Per Diem Payments Frequently Asked Questions," Page 2.
Internal Revenue Service. "Topic No. 511 Business Travel Expenses."
Internal Revenue Service. "2022-2023 Special Per Diem Rates."