Per Diem and Per Diem Tax Rates

What is Per Diem? Per diem is a fixed daily allowance for employees to cover expenses during business travel. It includes lodging, meals, and incidental costs.  Per diem is a Latin word that means per day or for each day. It simplifies expense management by avoiding the need for detailed expense tracking and reimbursement. Per diem can be broken down into two key uses: Per diem expenses: It’s a daily budget for employees to cover costs when traveling for work. Per diem rates are when employees are paid by the day instead of a regular salary. They are usually for freelancers, consultants, and contractors who are paid by the day or hour.  It sounds simple, but the government has set rules about how such an income is reported and taxed.  The U.S. General Services Administration (GSA) sets standard per diem rates annually, which vary by location to account for differences in living costs. What Does Per Diem Covers? When your employees travel for work, per diem simplifies the process of reimbursing them for their business trip expenses.  The General Service Administration divides it into two main parts: meals and incidental expenses (M&IE) and lodging. Meals and Incidental Expenses (M&IE) M&IE covers expenses related to eating and minor day-to-day costs. It includes: All meals (breakfast, lunch, and dinner) Room service Laundry services (dry cleaning and pressing of clothing) Tips and fees (food servers and luggage carriers) The GSA sets different per diem rates for cities based on their size and the business travel volume they receive.  Big cities, like San Francisco and Boston, have the highest daily M&IE allowance of approximately $92. Meanwhile, smaller but still busy cities like Tampa and Cleveland offer rates around $80. Lodging Expenses Lodging expenses cover your employee’s stay, which could be at hotels, motels, or resorts. The lodging per diem is separate from M&IE, with rates varying by location.  For example, Boston’s lodging per diem for 2024 is set at $349, while M&IE is $92. In New York City, lodging rates can range from $165 to $342, with M&IE maxing at $79. The per diem method is a nuanced approach to reimburse employees fairly to reflect the actual expenses incurred in the travel. How Does Per Diem Work? Per diem is an alternative to reimbursing an employee’s expense during business travel. The employer offers a predetermined allowance instead of reimbursing the employee with the exact amount.  The per diem allowance varies for different states, reflecting the cost of living in these areas. It can be paid in advance or reimbursed after the trip.  Employees may still be asked to submit an expense report despite the fact that it is a fixed daily rate. However, these reports are generally less detailed and should include information like the date and time of travel, location, total expense, and purpose of the visit.  Per Diem for Government Employees The General Services Administration (GSA) sets per diem rates for federal employees on official travel each fiscal year. These rates are a benchmark for employers to guide their per diem policies.  The per diem rates are updated annually on October 1 to account for changes in costs due to factors like inflation and seasonal demand.  The new standard rates apply to over 2,600 United States counties and 302 high-cost areas that receive specific rates every year.  As of 2025, the standard lodging rate has been updated to $110 per day, with meals and incidental expenses (M&IE) ranging between $68 and $92. The GSA's official website provides specific details and rates for different locations. Per Diem for the Self-Employed The IRS offers per diem rates for self-employed individuals that you can use only for meal expenses on a business trip. The meal expenses are not taxable income if they do not exceed federal per diem rates. However, you need all the travel details handy, like the date and time of travel, location, purpose, etc. Also, keep your bills in case you need them for tax purposes.  For lodging and other travel expenses, you must directly deduct the related costs on your tax returns, typically on Schedule C. Why do Companies Pay Per Diem? Companies pay per diem for several key reasons: Simplifies reimbursement: Eliminates the time spent tracking single receipts and the presentation thereof. Covers business travel expenses: Correct remuneration requires an increase in meals, accommodation, and other expenses for the whole day. Cost control: It is beneficial in controlling and, to some extent, minimizing the...