What are Per Diem Rates and How Are They Set?
When employees travel, they have expenses for lodging, meals, car driving or rental, incidentals and more. Your business can reimburse these expenses without creating a taxable event to the employee by paying or reimbursing the employee with a set, per-diem amount.
The term per diem (from the Latin "by day") is a daily allowance for specific travel expenses for employees. The U.S. per-diem rate includes two components: lodging, and meals and incidentals. Incidental expenses include fees and tips, room service, and laundry/cleaning services. Other incidental expenses aren't covered under the per diem rate. Your business can give employees an "incidentals only" per diem of $5.
Employee driving expenses are handled separately from per diems. To account for these expenses you can use actual expenses or the standard IRS mileage rate.
Per Diem Rate Options
If you decide to use per diems for employee travel, you can use them for some expenses but pay others at the actual expense. Your options are:
- Use per diems for both lodging and meals and incidental expenses (M&IE)
- Use per diems for M&IE only (there are some restrictions on using this method.
- Use a $5 per diem for incidental expenses only.
(There is no option for paying lodging expenses only by per diems).
- Use a high-low method that sets one high rate and one low rate annually. The high rate is for all high-rate cities and the low rate is for all other cities.
Per Diem Rates and Taxes
Employee Taxes. If you meet IRS requirements for using per diem rates, your reimbursements to employees aren't taxable to the employee. Employee reimbursements are taxable to the employee if:
- The employee doesn't file an expense report
- The expense report doesn't include the date, time, place, amount, and business purpose of the expense.
- Your business gives the employee flat amount and you don't require an expense report, or
- You pay an employee a per diem in excess of the allowable standard federal rate.
There are limits to the amount you can deduct for some expenses, like meals (entertainment expenses are no longer deductible for business purposes).
Your business must have an accountable plan for employee reimbursement expenses in order to comply with IRS regulations regarding per diem expenses. To qualify as an accountable plan, you must have a written plan that has three elements:
- The employee's expenses must have a business connection
- The employee must adequately account to you for these expenses within a reasonable time, and
- The employee must return any excess reimbursement or allowance within a reasonable time:
When you consider which reimbursement method to select, remember that, as of 2018, employees may not take a deduction for unreimbursed business expenses.
Your Business Taxes. Your business may deduct ordinary and reasonable expenses for employee travel, including per diems. To claim the deduction, you must reimburse your employees for these expenses under an accountable plan. If you aren't using per diems, your business tax deduction for meals is limited to 50%.
If your business has an accountable plan 9as explained above) and you pay a per diem rate instead of actual expenses, your employees don't need to document expenses. But the expenses must be "ordinary and necessary" and your employees must still document the date, place, and business purpose for the travel.
How per Diem Rates Are Set
In the U.S. the General Services Administration (GSA) sets the per diem rate for each U.S. city and state and for foreign travel. Per diem rates change as costs rise, and they vary based on the geographic area in which the employee is traveling. Costs for hotels, meals and other typical travel expenses can vary widely from one city to another.
The per diem rates get updated every year, usually on October 1st, with the beginning of the U.S. government's fiscal year. You can search for per diem rates for locations where you are traveling by going to this GSA Per Diem webpage.
The GSA has a mobile app you can use to look up current per diem rates:
- By city/state or ZIP code for locations in the continental United States (CONUS), or
- Total daily rates for lodging and meals (incl incidentals) by month for the current (U.S. government) fiscal year.
How to Read the per Diem Rate Table
The GSA Per Diem Rate Table (CONUS refers to the continental U.S.; OCONUS refers to outside the continental U.S.) information is primarily for U.S. government employees, but it can be used by private employers who want to use the per diem rates.
The per diem table now is searchable. You can search by state and city or by zip code. You will see a breakdown of lodging rates by month and the allowable per diem for meals and incidentals at the right. Some months may be different. Notice that this is the "maximum lodging rate per month, including taxes.
If your employee is traveling to two cities on the same day, use the rate for the location where the employee sleeps.
The U. S. State Department sets per diem rates for foreign travel. You can find more information on the State Department's Per Diem page.
As usual with the IRS, there are many more details you need to know if you want to use per diems for employee travel. Learn more about Per Diem Rates in IRS Publication 535. Business Expenses.
Caution: Per diem expenses look simple, but they aren't, and there are tax consequences to your business decisions on how to reimburse employees. Get help from a tax professional before you implement a per diem reimbursement policy.
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