Less than 1% of tax returns get audited, but it’s crucial to ensure your business stays within the safe 99%. Filing taxes for businesses is more complicated than individual returns due to the numerous variables involved. For businesses with employees traveling for work, per diem allowances are a common consideration.
What Is covered by per diem?
Per diem allowances help businesses simplify expense management by covering daily travel expenses for employees. However, per diem does not include transportation to and from the destination, which can be booked by the employer or reimbursed separately. Employers can use two primary methods for per diem:
1. Lodging and meal costs combined
2. Meal costs only
Employers can pay per diem upfront via cash or a company credit card or reimburse employees after travel. Eligible expenses include:
- Meals
- Lodging
- Room service
- Laundry and dry cleaning
- Service tips (e.g., food servers and baggage handlers)
It’s worth noting that self-employed individuals can only use per diem rates for meal costs.
To ensure per diem payments are not taxable, employees must provide an expense report that includes details such as trip dates, locations, business purposes, and lodging receipts (if applicable). These reports must be submitted within a reasonable timeframe, usually 60 days. Without a valid report, the payment becomes taxable as wages.
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Per diem payments are taxable under the following conditions:
No expense report is filed
The report lacks essential details (e.g., date, time, and business purpose)
A flat payment is provided without requiring an expense report
The amount exceeds the federal per diem rate
When taxable, these payments are treated as wages, and taxes are due from both the employer and employee.
Tax implications and GSA rate updates
The tax implications of per diem depend on whether the allowance follows an accountable plan or non-accountable plan:
1. Meals and Incidental Expenses (M&IE):
Under a nonaccountable plan, per diem payments are taxable and included in the employee’s wages.
Under an accountable plan, payments are not taxable if employees substantiate their expenses and file timely reports.
2. Lodging Expenses:
Payments for lodging are typically considered taxable unless substantiated under an accountable plan.
Actual expense reimbursements are required in certain situations, such as prearranged accommodations, elevated costs due to special events, or travel to disaster areas. Agencies may authorize reimbursement up to 300% of the per diem rate, provided receipts are submitted.
The General Services Administration (GSA) updates per diem rates annually to reflect regional cost changes. For FY 2025, the updates include:
- Standard lodging rate: Increased from $107 to $110
- M&IE rates: Standard rate raised from $59 to $68, with non-standard areas ranging from $68 to $92
Some previously classified non-standard areas (e.g., Ft. Wayne, IN, and Waco, TX) now follow the standard rate.
These updates impact budgeting and expense reporting, and businesses must adjust their per diem policies accordingly. While per diem doesn’t cover mileage expenses, businesses can reimburse mileage separately, based on IRS rates or company-specific policies.
Best practices for managing per diem
Employers can choose to pay more or less than the standard per diem rates, but consistency is key. If paying above the standard rate, the excess is taxable. For lower payments, the IRS provides guidelines to allocate costs.
Additionally, businesses often hire per diem employees—temporary workers paid a daily rate. These employees may be classified as contractors or regular employees depending on the nature of their work.
For streamlined expense management, consider adopting software solutions designed to simplify tracking and reporting per diem and other business expenses.
Want to learn more? Schedule a demo to see how our platform can make your expense management stress-free.
