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What is a Per Diem Rate? What Do I Need to Know about Per Diem Rates?


Question: What is a Per Diem Rate? What Do I Need to Know about Per Diem Rates?

Per diem rates

Per diem rates are daily expenses set for employees traveling for business purposes. Per diem rates are set for U.S. and overseas travel, and rates differ depending on the area. For example, per diem rates in larger U.S. cities are higher than for sections of the country outside larger metropolitan areas. Companies can set their own per diem rates, but most businesses use the per diem rates set by the U.S. government, through the General Services Administration.
The GSA Per Diem Page allows you to search on per diem rates for federal and military employees for each U.S. state and foreign countries, and by year.

What's Included in Federal Per Diem Rate Tables?
Federal per diem tables, including those set by the IRS (Publication 1542)(PDF) include only (1) lodging and (2) Meals and incidental expenses (M&IE). The tables in Publication 1542 show per diem allowances for specific areas in the U.S. For some areas, the per diem rates change during the year, based on cost of living in that area.

Reimbursing Employees for Business Travel - Tax Implications
It is important for businesses to pay attention to current federal per diem rates because payment to employees of reimbursements in excess of the federal rates can have tax consequences. If you reimburse more than the maximum allowable rate, the excess is considered a benefit to the employee and must be considered in the employee's taxable income.

The IRS says, "If the per diem or allowance paid exceeds the amounts specified, you must report the excess amount as wages. This excess amount is subject to income tax withholding and payment of social security, Medicare, and FUTA (federal unemployment) taxes...." The excess is reported on the employee's W-2 form in Box 12, using Code L. (Source: IRS Publication 15

Per Diem Rates and Accountable Plans
A business can set per diem rates for any travel expense, including per phone use, taxi and other ground transportation fees, laundry/dry cleaning fees, and any other expenses employees encounter while traveling for their company for business purposes. But all per diem reimbursements to employees must be paid as part of an accountable plan. If employee reimbursements are part of an accountable plan, those reimbursements are not taxable to the employees. All three of these requirements must be met:

  • There must be a business connection to the expenditure. This means that the expense must be a deductible business expense incurred in connection with services performed as an employee. If not reimbursed by the employer, the expense would be deductible by the employee on his/her 1040 income tax return.
  • There must be "adequate" accounting by the recipient within a reasonable period of time. This means that your employees must verify the date, time, place, amount and the business purpose of the expenses. Receipts are required unless the reimbursement is made under a per diem plan.
  • Excess reimbursements or advances must be returned to the employer within a reasonable period of time. Reasonable depends upon facts and circumstances. Excess reimbursements or advances are those over the federal maximum per diem rate.
Remember, all three requirements must be satisfied. If the conditions for an accountable plan are not met in full, the plan is called "non-accountable," and all reimbursements, not just "excess" reimbursements, may be subject to tax to the employee.

Per Diem Rates - What You Should Do Now

  • Read more about per diem allowances
    This discussion of per diem rates is necessarily brief. For more details on how to administer per diem reimbursements for employees, read through the section on per diem and other fixed allowances in IRS Publication 15.
  • Keep up to date on per diem rates for places where employees travel.
  • Make sure you have an accountable plan
    Set up processes to reimburse employees for per diems and other travel expenses that conform to the requirements for an accountable plan. To to this:
    • Make sure that all employee travel expenses are for legitimate business purposes
    • Require employees to provide adequate accounting of their expenses, including date, place, amount, and business purpose for the expense, and
    • Make sure employees reimburse you for excess per diem payments (in excess of federal per diem rates) within a reasonable amount of time.

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