Employees incur expenses for accommodations, meals, transportation and incidentals -- laundry, dry cleaning, parking and tips -- when their jobs take them away from home. Some companies require itemized expense reports accompanied by receipts documenting money spent to repay their employees what they actually spent. Others opt to name a set amount that employees may spend while on business trips. Nolo defines such “payment of a set amount for each day's expenses for an employee or agent” as “per diem.”
Because travel expense reimbursement carries tax implications for the employee and the organization, the IRS has established a “revenue procedure” that defines allowable per diem expenses and reporting. The IRS allows two per diem options: a “per diem rate for combined lodging and meal costs” or “a per diem rate for meal costs alone.” However, notes Tax Adviser, following “the revenue procedure is not mandatory” as the business “may use actual allowable expenses” provided it maintains records with “proper substantiation.”
The General Services Administration, or GSA, sets the per diem rates each year for continental U.S. locations (CONUS). The Department of State updates per diem rates each month for foreign locations, while the Per Diem, Travel and Transportation Allowance Committee of the U.S. Department of Defense calculates per diem rates each year for Alaska, Hawaii, Guam and other noncontinental, U.S. locations. CONUS rates can be found in IRS Publication 1542.
The GSA per diem tables list rates for lodging, meals and incidental expenses -- M & IE. The IRS defines M & IE as “all meals; room service; laundry, dry cleaning and pressing of clothing and tips.” Further, the GSA presents two per diem options: a standard rate and what is known as the “high-low” rate. The standard, federal rate assigns a “city-by-city” dollar amount for the continental U.S. The high-low rate applies one rate to lower-cost locations and a different rate to higher-cost locations. According to the Evangelical Council for Financial Accountability, the high-low rate requires less administration.
According to the IRS, per diem reimbursements are not taxable as wages if the amount paid to the employee “is equal or less than the federal per diem rate,” and the employee submits an expense report within 60 days. Expense reports must note the trip’s “business purpose, date and place.”
IRS regulations limit per diem for self-employed individuals to meal costs. Like other business travelers, the self-employed should document the purpose, time and location of their trips. The IRS revenue procedure includes steps for calculating deductible expenses related to business travel for employees who do not get repaid for business meals and incidentals, according to Tax Adviser.
- IRS: Per Diem Frequently Asked Questions
- Nolo: Nolo’s Plain-English Law Dictionary; Per Diem
- Internal Revenue Bulletin: 2009-42; October 19, 2009
- The Tax Adviser: IRS Updates Rules for Substantiating Travel Expenses; Alistair Nevius, J.D.; Jan. 2008
- U.S. General Services Administration: Federal Travel Regulation Discussion Definition of Incidentals as It Pertains to Per Diem
- U.S. Department of State Office of Allowances: Foreign Per Diem Rates by Location
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