If you’re traveling for business reasons, you’ll probably incur lodging, meal and incidental expenses. This is where per diem payments come in. Your employer provides these as reimbursement for such expenses, and the payments usually aren’t taxable. But the rate at which you are reimbursed varies depending on a number of factors. We take a closer look below. Financial advisors can guide you through any of your tax planning or income tax-related questions.
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, per diem can only be used for meals. As for the U.S., per diem is only available at destinations within the lower 48 Continental United States (CONUS), according to the General Services Administration (GSA). The State Department sets the foreign per diem rates (for countries such as China, France, Germany, etc), while the Department of Defense (DOD) controls the non-foreign rates in Alaska, Hawaii and all other U.S. Territories.
Your per diem payments won’t be included in your wages if the following qualifications are met:
- The payments are equal to or less than the federal per diem rate, and
- You give your employer an expense report. The IRS states that expense reports must include the business purpose of the trip, the date and place of the trip and receipts for lodging.
Is Per Diem Taxed?
Per diem payments aren’t subject to income tax since they aren’t included in an employee’s wages. However, your payments will be taxable if the following apply to you:
- You didn’t file an expense report with your employer.
- Your expense report filed doesn’t include the date, time, place, amount and business purpose of the expense.
- Your employer gives you a flat amount and no expense report is required.
- Your per diem payments exceed that of the standard federal rate.
It’s important to understand your employer’s per diem policy before accepting the payments to make sure that you know if you’ll be taxed or not.
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 things like housing, healthcare and taxes. As you can imagine, this directly affects how much you’ll receive in per diem payments before you’re taxed.
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 and should probably be used to verify what your employer is willing to give you if you want to double-check any potential tax payments that you’ll be required to make.
Can Employers Deduct Per Diem Payments?
If you’re a business owner paying per diem or looking to make an argument to start receiving these types of payments at your business, then you’re in luck. Employers can deduct up to 50% of per diem payments that are made for meals or incidentals. Plus, the business can deduct the entire lodging expense that is incurred, as long as expense reports are kept on file.
Again, if you’re a self-employed business then it becomes more difficult to get credit for per diem payments to yourself. Lodging rates can’t be used and instead, the exact expense must be submitted and kept in a report. The same 50% of meal costs can be deducted, however.
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. If you’re self-employed, however, you’ll only receive per diem payments for meal expenses. These payments typically aren’t subject to income tax, unless you haven’t filed an expense report with your employer. If you’ve followed the guidelines to earn the per diem allowance, you’ll also want to keep in mind that rates vary by location.
Tax Planning Tips for Beginners
- Financial advisors can provide professional guidance on tax planning and much more. Not sure where to find the right fit? SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one 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. If you’re self-employed, you’ll have to pay both income taxes and self-employment (SE) taxes. As you plan out your budget, it’s best to not be caught off guard when tax season comes. Our income tax calculator can give you an estimate of how much you’ll pay.
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