What Is Per Diem, and How Is It Taxed?

Businesses give per diem payments to employees for business-related travel expenses. These funds may cover meals and incidentals, lodging or possibly both, and are often provided as reimbursement for such expenses. The payments usually are not taxable, though this can vary depending on your employer’s specific reimbursement arrangement, your travel documentation and the applicable federal per diem rates.

A financial advisor can help guide you through the tax planning process.

What Is Per Diem?

Per diem is the allowance, or reimbursement, given to employees for business travel and lodging, meals or incidental expenses. For self-employed individuals, federal per diem methods generally apply to meals and incidental expenses, while lodging deductions are based on actual expenses. Many businesses choose to provide payment cards for valid business expenses that meet specific requirements.

In the U.S., the General Services Administration (GSA) establishes federal per diem rates for the lower 48 contiguous states, known as the continental United States (CONUS). Meanwhile, the Department of Defense (DOD) controls the non-foreign rates in Alaska, Hawaii and all other U.S. Territories. The State Department sets the foreign per diem rates for travel to other countries.

Your per diem payments won’t be included in your wages if they meet the following qualifications:

1. The payments are equal to or less than the applicable federal per diem rate or another amount permitted under IRS substantiation rules, and
2. You give your employer an expense report. The IRS states that you must substantiate the business purpose, dates and location of your travel within a reasonable period. When an employer uses an eligible per diem method, it’s generally not necessary to provide receipts for individual meals and lodging expenses in order to substantiate the amount covered by the allowance.

Additionally, the payments must be made under an accountable plan. Any excess allowance that is not substantiated must be returned within a reasonable period for it to remain excluded from wages.

Is Per Diem Taxed?

Per diem payments generally aren’t subject to income tax when they qualify as reimbursements under an employer’s accountable plan. However, some or all of your payments may be taxable if the any of the following apply:

• You didn’t file an expense report with your employer.
• Your expense report filed doesn’t include the required details about your business travel.
• Your employer gives you a flat amount without requiring an expense report.
• Your per diem payments exceed the applicable federal rate and you do not return the excess. In that case, generally only the excess amount is treated as taxable wages, provided the remaining allowance meets the accountable plan requirements.

It’s important to understand your employer’s per diem policy before accepting the payments to avoid additional tax liability.

Per Diem Rates By Location

Just as the cost of living varies for different areas, so do per diem rates. Each city, town and state has fluctuating economic costs for costs like housing, healthcare and taxes.

For fiscal year 2027, which runs from Oct. 1, 2026, through Sept. 30, 2027, the GSA standard rate is $178 per day, consisting of $110 for lodging and $68 for meals and incidental expenses (M&IE). ¹ Some destinations have higher rates, and lodging rates can vary by season.

The IRS also provides an optional high-low substantiation method for qualifying business travel. For travel beginning Oct. 1, 2026, the rates are $329 per day for designated high-cost localities and $230 for other localities within CONUS. ² These rates include lodging, meals and incidental expenses and are separate from the GSA’s location-specific rates. Location directly affects how much you’ll receive in per diem payments without triggering the tax.

There are generally two ways to confirm the per diem rate for your area: You can check with your employer, or you can use the GSA’s per diem rate finder. The tool allows you to search by city, state or zip code. It allows you to verify what your employer may give you if you want to double-check if you’ll owe any potential taxes.

Can Employers Deduct Per Diem Payments?

Employers generally can deduct 50% of the meal portion of qualifying per diem payments, subject to applicable exceptions. The incidental expense portion may also be subject to the meal deduction limitation under the applicable per diem method. Qualifying business lodging expenses are generally fully deductible, subject to the usual business expense rules and substantiation requirements.

If you’re a self-employed business owner, you generally cannot pay yourself a tax-free per diem allowance as an employee. However, you may use the federal M&IE per diem method to calculate deductible business travel meal expenses. Lodging deductions must be based on actual qualifying expenses. You can deduct the same 50% of meal costs, however.

What It Costs When You Don’t File an Expense Report

Overlooking documentation requirements can turn tax-free per diem into taxable income. For instance, if you received $2,000 in per diem but failed to submit an expense report, the entire amount may become wages subject to federal income tax.

Here’s what that costs at different income levels, assuming the full $2,000 is taxable and the taxpayer uses the 2026 federal income tax brackets for single filers:

Single Filer With $50,000 in Taxable Income (Before Per Diem):

Single Filer With $100,000 in Taxable Income (Before Per Diem):

Single Filer With $150,000 in Taxable Income (Before Per Diem):

As you can see, the cost varies with your marginal tax bracket. In these examples, a $2,000 undocumented per diem allowance results in $440 to $480 in additional federal income tax. Taxable allowances may also be subject to Social Security and Medicare taxes, as well as applicable state and local income taxes. Proper documentation under an accountable plan can prevent taxation.

Self-Employed: Per Diem vs. Itemizing Actual Expenses

Self-employed workers face a different calculation. You can’t deduct lodging through per diem, and the meal deduction is only 50% of the applicable M&IE rate. For FY 2027, the standard per diem is $178 per day ($110 for lodging and $68 for meals and incidental expenses). Whether per diem makes sense depends on what you actually spend versus what the rate allows.

Example 1: Your Meal Expenses Are Lower Than Per Diem Allows

The FY 2027 M&IE rate is $68. As a self-employed worker, you can deduct 50% of that, or $34 per day. If you only spent $20 per day on meals, deducting actual expenses would generally produce a $10 daily deduction ($20 × 50%), compared with $34 under the per diem method. That is a $24 daily deduction difference, or $480 over 20 qualifying travel days.

Example 2: Your Meal Expenses Exceed the Per Diem Allowance

Instead, let’s say you spent $50 per day on meals during a business trip. The per diem allows $34/day deductible (50% of $68). Itemizing actual expenses gives you a $25/day deduction ($50 × 50%), which falls short of per diem.

In this case, per diem wins because the FY 2027 rate is generous enough to cover your actual spending after the 50% limitation. While itemizing may be simpler when you already track actual meal expenses, the per diem method may provide a larger deduction even if your actual spending is lower. Keep receipts and track mileage, lodging and meal costs. If your actual expenses consistently exceed per diem rates, itemizing may yield larger deductions over time. A tax professional can help you determine which method saves more based on your typical business travel patterns.

Bottom Line

You may be eligible to receive per diem payments if you’re traveling for business purposes. These payments cover costs such as lodging, meals and incidental expenses. You’ll receive reimbursement for all three costs if you work under an employer. Self-employed individuals may use eligible federal per diem rates to calculate meal and incidental expense deductions, but they generally must deduct actual lodging expenses. These payments typically aren’t subject to income tax, provided they meet the requirements of an employer’s accountable plan.

“Per diem is typically non-taxable so long as you’re organized and follow the proper procedures. Like anything, poor records and inaccurate accounting can turn this non-taxable perk into taxable income,” said Matthew Hofacre, MSPFP, CFP®, EA.

Matthew Hofacre, MSPFP, CFP®, EA provided the quote used in this article. Please note that Matthew is not a participant in SmartAsset AMP, is not an employee of SmartAsset and has been compensated. The opinion voiced in the quote is for general information only and is not intended to provide specific advice or recommendations.

Tax Planning Tips for Beginners

• Financial advisors can provide professional guidance on tax planning and much more. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you work under an employer, you’ll probably be subject to income tax. Those who are self-employed, however, will have to pay both income taxes and self-employment (SE) taxes. To know what to expect come tax season, our income tax calculator can give you an estimate of how much you’ll pay.

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