What are Per Diem Rates and How Are They Set?
When employees travel, they incur expenses for lodging, meals, car rental, incidentals and more. As an employer, you 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. The U.S. per-diem rate includes two components: lodging, and meals and incidentals. The IRS says per diem is the highest allowable rate paid by the U.S. government to federal employees who are traveling away from home. Even though the rate table was originally designed for federal employees, the IRS also uses it for private employers who want to provide employees with a daily budget for travel.
Understanding how per diem payments work can prevent any issues with employees owing taxes on non-wage income from expense reimbursements. If you use per diems for employee travel, anything you pay employees that exceeds the per diem rate is taxable to the employee.
How per Diem Rates Are Determined
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. The Department of Defense and other federal agencies use the GSA per diem rate table. You can check the current per diem rates by going to this General Services Administration webpage: https://www.gsa.gov/travel/plan-book/per-diem-rates .
Per diem rates are important for employers to follow because reimbursements to employees in excess of the allowable per diem rates are taxable to employees as income. Employers must have an accountable plan for employee reimbursement expenses in order to comply with IRS regulations regarding per diem expenses.
Current Per Diem Rates
The IRS has announced the 2018-2019 special per diem rates. The rates include:
- Special transportation industry meal and incidental expenses (M&IE) rates,
- The rate for the incidental expenses only deduction, and
- Rates and lists of high-cost cities and locations.
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." Rates paid in excess of the maximum are taxable to employees as income.
Be sure to use the correct table; the CONUS for the continental US and the OCONUS for outside the continental U.S. You can't use per diems for international travel.
Expense Reimbursements and Taxes
The IRS says that per diem reimbursements are non-taxable even if they exceed actual expenses but not if they exceed the federal rate. For example, if an employee is in Tampa for a conference in May 2018, that employee can claim, or turn in the per diem rate for that geographical area of $106, plus $54 for meals and incidentals.
If you want to use per diems for employees, you must use them for the entire calendar year, but you can reimburse actual expenses or use the designated per diem rate for meals and incidentals in specific city locations.
You can also cover meals and incidentals with the per diem if you pay lodging directly, provide lodging in-kind, or reimburse actual lodging expenses. You may also use per diems for meals and incidentals for day trips where there are no lodging expenses.
More Details, Restrictions, and Qualifications from the IRS
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 463: Travel, Entertainment, Gift and Car Expenses.