Understanding ‘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’s 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.
What Does Per Diem Cover?
The GSA breaks down per diem rates into two categories:
- Meals and incidental expenses (M&IE)
The meals and incidental expenses (M&IE) category covers all meals (breakfast, lunch and dinner) and room service; laundry, dry cleaning and pressing of clothing; and fees and tips for the people who provide services, such as food servers and luggage carriers. Per diem rates for meals vary by location and are broken down into six tiers.
Major cities typically have the maximum per diem tier of $74 (for fiscal year 2017); smaller cities that host substantial business-related travel have per diems that fall in the tier 2 to tier 5 range ($51 to $66); and areas that are not typically visited by business travelers will have the minimum tier rate of $51.
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 fiscal year 2017, the per diem rates for Atlanta are $140 for lodging and $69 for M&IE. For Chicago, lodging rates range between $137 and $212, depending on the month, and the M&IE per diem is $74.
Why Do Per Diem Rates Differ 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 for 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.
How do I find per diem rates for a specific location?
Ask your employer’s Human Resources or Accounting department for specific rates, or look up the information yourself 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 (for example, if you search for 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.
What if my location isn’t listed in the GSA tables?
A standard rate of $51 per diem for meals and incidental expenses and a standard rate of $93 per diem for lodging (fiscal year 2018) applies to any location that doesn’t have a specified rate in the GSA tables. This holds true for all states in the Continental U.S.
Does my employer have to use the rates set by the General Services Administration?
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. For travel on or after Oct. 1, 2016, the rate is $282 ($68 if M&IE only) for travel to any high-cost area, and $189 ($57 M&IE) for travel to any other location in the Continental U.S. (Figures may rise on and after Oct. 1, 2017.)
Do I have to pay 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 didn’t file an expense report with your employer.
- Your expense report didn’t include the date, time, place, amount and business
purpose of the expense.
- Your employer simply 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’s 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.
Can per diem ever be used 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 wages to be labeled as something else – in this case, per diem.
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. 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 with 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. For more advice on ways to handle employee expenses, see Using Business Credit Cards Strategically.
This article was originally published on Investopedia.