Can Per Diem Funds Be Taxed?

Can Per Diem Funds Be Taxed?
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What are the current per diem tax rules? And is per diem considered income? If you engage in a lot of business travel or are self-employed, you need to have answers to these kinds of questions.

Are Per Diems Taxable?

Employers often provide allowances for the costs associated with employee business travel. Known as ​per diem​, meaning each day, these travel costs include meals and incidentals as well as lodging.

Depending upon where you're traveling, the per diem money rates are set annually by the General Services Administration (GSA), the Department of Defense or the State Department, and each city has its own per diem rates you’re allowed to receive as mandated by the per diem contract established with the government.

The IRS also has a flat rate for high-cost locations, and a lower flat rate for less costly areas, if your employer chooses not to use the per diem set by the GSA.

When Is Per Diem Taxed?

Your per diem will only become taxable if it exceeds the official rates established by the IRS or if you cannot provide proper documentation of per diem expenses for your employer. Also, according to the IRS per diem guidelines, you must also pay taxes on your per diem if your employer provides you with a flat rate amount for business travel and does not require an expense report.

Finding Your Per Diem

Your IRS per diem rates include the meals and incidental expenses, also known as M&IE, you incur during your travels. M&IE covers your meals, room service, laundry services such as dry cleaning, and incidental expenses for services provided such as tips for wait staff or luggage porters.

Also included in your per diem are your lodging expenses. Eligible lodging includes accommodations for overnight stays at hotels, resorts, inns or longer-term accommodations like renting an apartment.

Looking for Variations

Because per diem varies depending upon a particular area’s cost of living, check with your employer or visit the General Services Administration’s website to find out what you can expect to receive in per diem for the city you’re visiting. Large, metropolitan cities have a higher per diem than smaller or more remote locations. The lodging portion of your per diem not only varies by location, but also by time of year.

Per Diem takes into account that cities often have on and off seasons. Lodging allowances will be greater in months when an area sees more tourists or business travelers, and available rooms are costlier.

According to the 2021-2022 IRS per diem guidelines, the per diem rates stand at ​$296​ when traveling to any high-cost locality and ​$202​ when traveling to any other locality within Continental U.S. (CONUS).

Be sure to read IRS notice 2021-52 to familiarize yourself with all the IRS per diem adjustments and current guidelines for 2021-2022.

Obtaining Tax Rules

Generally, per diem funds, or day rate, are non-taxable because they are not considered wages.

However, if your per diem exceeds the daily federal allowable rate, or you didn’t file an expense report with your employer, then your per diem could be eligible for taxability of allowances. If you do find your per diem taxed, it will be subject to payroll deductions and federal income tax withholding.

Your employer will report this information on your W-2. If your per diem was taxed because it exceeded the federal daily amount, then you will only be taxed on the amount that exceeded the federal standard rate.

Reporting Your Per Diem

Keeping meticulous records of your business expenses makes the whole process of reporting your costs to your employer that much easier. In a log book, keep track of the purpose of the trip, date and location and any receipts for lodging – if using the meals-only per diem rate.

You must report these costs to your employer within ​60 days​ of the trip. Failing to meet these requirements may render your per diem taxable.