Can Per Diem Funds Be Taxed?

by Madison Garcia
If you don't maintain proper documentation, your entire per diem could be considered taxable income.

If you go out of town for work, your employer may offer you a per diem. Depending on the amount of the per diem, your actual spending and the documentation, the IRS may tax some or all of your per diem. If your per diem funds are taxable, your employer will include the amount in your annual form W-2.

How Per Diems Work

Per diems are fixed allowances to pay for employee expenses incurred while traveling out of town, designed to cover the cost of meals, snacks and lodging. Your employer may reimburse you separately for transportation costs, depending on the company policy. If the per diem falls within the IRS guidelines, your employer won't report your per diem funds as taxable income and you won't have to pay taxes on them.

Per Diem Amount

The U.S. General Services Administration determines the standard per diem rate according to the travel destination. If your company pays you a per diem at or below the standard rate, you're in the clear. However, if your per diem is more than the standardized amount, you'll have to pay tax on the excess. For example, if your employer pays you $20 a day in an area that the General Services Administration pegs at $15 a day, $15 will be tax free, and you'll pay tax on the remaining $5.

Per Diem Documentation

Even though you won't have to submit an expense report to get your per diem funds, keep track of your expenses while traveling. To be considered nontaxable income, the IRS requires your employer to maintain expense reports documenting how you spent your per diem. If you don't submit an expense report at the end of your trip, the entire amount of the per diem could be considered taxable.

Per Diem Excess

Frugal employees may try to skimp on their trip expenses when they receive a per diem and pocket the difference. However, if you do this, the amount in excess of your actual expenses becomes "no strings attached" funds, just like wages. To circumvent sneaky employees, the IRS requires employees to pay taxes on the difference between their actual expenditures and the per diem total.

About the Author

Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.

Photo Credits

  • Jupiterimages/liquidlibrary/Getty Images