IRS Rules Regarding Per Diem Rates

By Susan Landis-Steward , last updated January 13, 2012

The IRS rules and tax rates regarding Per Diem payments are worth knowing if you find yourself travelling or living out of town for any extended period of time at the behest of your employer. Per Diem, Latin for “per day”, is an amount paid by an employer to cover travel expenses, meals, mileage (if applicable), and any other costs incurred by an employee traveling on behalf of an employer, for the purpose of conducting the employer's business. Per diem payments are not part of the employee's wages and salary and is paid over and above normal wages. If your employer does not reimburse you for travel expenses, then you can deduct a certain amount of money (that corresponds to the accepted per diem rate in whatever locale you visited) from your taxes.

Per diem payments are based on the destination; the IRS provides tables that show the maximum amounts of money an employer can pay. The employer does have the option to pay more or to reimburse the employee for more, but the amount above the maximum is not deductible and may count as income.

If you are traveling to an expensive city, for example New York City or San Francisco, the maximum per diem limit will be more than if you were going to a small city with low expenses. If the city you are traveling to is not listed in the per diem tables provided by the IRS, you can use the Basic Rate.

If your employer does not pay per diem, or if you are self-employed, the federal government governs what you will be reimbursed for. You must have accurate, dated receipts, complete mileage logs if driving, and other expense documents to prove that you were traveling and how much lodging, food, incidentals, gas, and mileage cost.

Most businesses use the federal government’s standards for per diem rates. However, they don't have to. If they choose to pay less than the IRS allows, you can document this and include the difference in your annual tax return.

If you are traveling to attend a conference and meals and/or lodging are included in your conference registration fees, you must deduct these before figuring your actual per diem. Conference registrations (and the attendant meal and lodging included) are not considered part of your necessary costs while traveling. Your employer may pick up the costs but these are not counted in per diem. Likewise, if your hotel rate includes a free breakfast, you must deduct that portion of your per diem that is provided to cover breakfast expenses. Of course, if you dine out for breakfast with a client, you can then include that meal in your per diem.

Employer-paid per diem can be calculated one of two ways. One is to use the regular federal per diem rate based on information in the General Service Administration tables; this is a flat rate based on standard fees. The other method is the high-low substantiation method for high-cost cities. This pays substantially more for areas that have higher rates. It doesn't matter which you use, but you must use the same method for the same employee for the entire year.

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