If you or your employees travel for work, understanding per diem rates can dramatically simplify how you handle travel expenses at tax time. Instead of saving every coffee receipt and hotel folio, a per diem lets you reimburse or deduct travel costs using fixed daily allowances. This guide explains how per diem rates work in the United States, who can use them, and how to stay on the right side of IRS rules.
Per diem rates are fixed daily allowances the IRS and GSA set to cover lodging, meals, and incidental expenses while traveling for work. Using per diem rates lets travelers substantiate costs without keeping every receipt, simplifying recordkeeping for both employers and employees.
What is a per diem?
“Per diem” is Latin for “per day.” In a tax and travel context, it refers to a daily allowance an employer pays an employee, or that a business uses to account for travel costs, in place of reimbursing actual itemized expenses. Rather than tracking the exact price of every meal and hotel night, the traveler is covered up to a set daily amount tied to the destination. The amounts are published annually and vary widely by city because the cost of a hotel and dinner in a major metro area is very different from a small town. Because these allowances change each year and by location, you should always confirm the current figures before relying on them.
The lodging vs. M&IE split
Per diem rates are made up of two distinct components. The first is the lodging allowance, which covers your hotel or other overnight accommodation. The second is M&IE, short for “meals and incidental expenses,” which covers food plus small incidentals such as tips for service staff. The GSA publishes these two pieces separately for destinations within the continental United States (CONUS), while the Department of Defense and State Department set rates for non-foreign and foreign locations respectively. Keeping the two components separate matters because the tax treatment and the documentation rules can differ between lodging and M&IE.
The GSA standard rate and the high-low method
There are two common ways businesses apply per diem rates. The first is to use the location-specific GSA rates, which assign a particular lodging and M&IE figure to each covered city or county, with a “standard” rate applied to any destination that does not have its own listing. The second is the high-low substantiation method, an IRS-approved simplification that uses just two national figures: a higher rate for designated high-cost localities and a lower rate for everywhere else. The high-low method reduces the administrative burden of looking up hundreds of individual cities, but a business generally must apply it consistently for an employee throughout the year. Both the per-location rates and the high-low figures are revised annually, so look them up before each trip or reimbursement cycle.
Who can use per diem: employees vs. self-employed
This is where an important nuance comes in. Employers can pay per diem to employees for both lodging and M&IE, and employees do not have to report the reimbursement as income provided it stays within the federal rates and the employer uses an accountable plan. Self-employed individuals and sole proprietors, however, face a key restriction: they may use the per diem method for meals and incidental expenses only, not for lodging. If you are self-employed, your lodging deduction must be based on actual receipted costs, while you can still use the M&IE per diem to simplify your meal accounting. This distinction trips up a lot of independent contractors, so it is worth flagging to your tax advisor as part of your broader tax planning.
How per diem simplifies recordkeeping
The biggest practical benefit of per diem rates is that they remove the need to keep and reconcile a mountain of receipts. Under the per diem method, the amount of the expense is treated as substantiated as long as the traveler documents the time, place, and business purpose of the travel. In other words, you still need to prove that the trip happened and why, but you do not need to prove the exact dollar amount you spent on each meal. For businesses managing many traveling employees, this is a major reduction in paperwork and a cleaner way to handle travel-related business deductions. It also makes reimbursements predictable, which helps with budgeting.
The rules you must meet to qualify
Per diem is not a no-questions-asked allowance. To use it correctly, the travel generally must be away from your “tax home” (your main place of business) long enough that you need to sleep or rest to meet the demands of your work, which usually means an overnight stay. You still must substantiate the time, place, and business purpose of each trip, typically with an expense report submitted to the employer. The per diem amount you use cannot exceed the federal rate for that destination if you want the streamlined tax treatment; pay more than the federal rate and the excess is generally treated as taxable wages to the employee. Keeping these conditions in mind is what separates a clean per diem arrangement from one that creates a tax surprise later.
Partial travel days
Travel rarely starts at midnight and ends at midnight, so the rules account for partial days. For the first and last day of a trip, the M&IE per diem is reduced, with the IRS allowing 75% of the applicable daily M&IE rate for those travel days. Lodging is claimed for the nights you actually stay away. Applying the three-quarter rule on departure and return days is one of the details most often missed, and getting it right keeps your per diem totals defensible if they are ever questioned.
Per diem and accountable plans
For an employer’s per diem payments to be tax-free to the employee and fully deductible by the business, they should run through an accountable plan. An accountable plan has three core requirements: the expenses must have a business connection, the employee must adequately account for them within a reasonable period, and the employee must return any amounts paid in excess of substantiated expenses. When a per diem arrangement meets accountable plan rules and stays within federal rates, the payments are not reported as wages on the employee’s W-2. Fail the accountable plan tests, and the reimbursements can become taxable income, undoing much of the benefit.
A worked example
Imagine an employee based in Chicago who travels to a client in another city for a three-day, two-night trip. The employer uses the location-specific GSA rates and an accountable plan. The employee claims lodging for the two nights at the published lodging rate, and M&IE at the full daily rate for the one full day in the middle of the trip. For the departure day and the return day, the employee claims 75% of the M&IE rate under the partial-day rule. As long as the employee files an expense report documenting the dates, the destination, and the business reason for the visit, the entire reimbursement is tax-free and the employer deducts it as a travel expense. Note that the actual dollar figures depend on the current-year rates for that specific destination, which is why you should always pull up the live GSA and IRS numbers rather than relying on last year’s amounts.
Mistakes to avoid
A few common errors can turn a tidy per diem setup into a tax headache. First, do not pay or claim above the federal rate without realizing the excess is taxable. Second, self-employed travelers should never try to use per diem for lodging, only for M&IE. Third, do not forget the 75% reduction on first and last travel days. Fourth, never skip documenting the business purpose of the trip just because per diem removes the receipt requirement; the time, place, and purpose still must be substantiated. Finally, do not assume last year’s figures still apply: per diem rates are updated annually, and high-cost locality lists change, so verify the current numbers every year.
Frequently asked questions about per diem rates
Are per diem rates taxable income?
No, not if they are paid under an accountable plan and stay within the federal per diem rates for the destination. If the payment exceeds the federal rate, or the plan is non-accountable, the excess or the full amount can become taxable wages reported on the employee’s W-2.
Do I need receipts when I use a per diem?
You do not need receipts for the actual cost of meals and incidentals covered by the per diem, but you must still document the time, place, and business purpose of the travel. For lodging, employees on an employer’s per diem are covered by the allowance, while self-employed taxpayers must keep actual lodging receipts.
Can self-employed people use per diem rates?
Self-employed individuals and sole proprietors can use the per diem method for meals and incidental expenses only. Lodging must be deducted based on actual, receipted costs. This is one of the most important differences between employees and the self-employed when it comes to travel deductions.
Where do per diem rates come from and how often do they change?
The GSA sets per diem rates for the continental United States, the Department of Defense covers non-foreign areas like Alaska and Hawaii, and the State Department covers foreign locations. The IRS publishes the high-low rates and the special meal rates for transportation workers. All of these are revised annually, typically effective at the start of the federal fiscal year in October.
What is the high-low method for per diem?
The high-low method is an IRS-approved shortcut that replaces hundreds of city-specific rates with two national figures: one higher rate for designated high-cost localities and one lower rate for all other destinations. It simplifies administration but must generally be applied consistently for a given employee throughout the year.
Get help applying per diem rates correctly
Per diem can save you hours of receipt-wrangling and keep your travel deductions clean, but the rules around accountable plans, the employee-versus-self-employed split, and partial days are easy to get wrong. Tranzesta works with businesses and individuals across the US and UK to set up compliant travel reimbursement policies and maximize legitimate deductions. Book a free consultation and we will help you put a per diem policy in place that holds up.
To confirm current figures and rules, see the official sources: the IRS for per diem and accountable plan guidance, and the GSA per diem rates for location-specific lodging and M&IE amounts.
Disclaimer: This article is for general informational purposes only and does not constitute tax, legal, or accounting advice. Per diem rates and tax rules change frequently and vary by location and tax year. Always verify current GSA and IRS rates and consult a qualified tax professional about your specific situation before acting.
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