If you are an employee who travels on business or for work purposes, you can take advantage of the per diem method. Per diem offers an alternative to reimbursement based on detailed expense records and requires less bookkeeping.
But one question that many people ask is whether your per diem is taxable. Those who ask this question will find the answer to be a bit complicated. Whether or not per diem payments are taxable depends on some factors, including the kind of work you do and situations.
Is Per Diem Taxable? No, per diem is not taxable. Per diem is a reimbursement for business expenses incurred while traveling away from home. Expenses that are typically reimbursed through per diem allowances include lodging, meals, and incidental expenses.
In this guide, we will help you better understand whether or not per diem payments are taxable, so don’t worry.
Let’s get started!
Is Per Diem Taxable?
Per diem is usually not taxable, but in some cases it may be. Per diem is a fixed amount that employees are reimbursed for daily lodging, meals, and incidental expenses incurred during business travel. In the case of self-employed individuals, per diem is only applicable to meals.
The General Services Administration (GSA) sets the rates of per diem each year for destinations within the lower 48 Continental United States (CONUS). Foreign per diem rates are set by the State Department (for countries such as China, France, Germany, etc) and non-foreign rates are set by the Department of Defense (DOD) in Alaska, Hawaii, and all other U.S. Territories.
In terms of taxation, Per diem payment is not subject to income tax since it is not considered part of the employee’s salary. However, your payments will be taxed if you meet the following conditions:
- The payment is more than the allowable federal per diem rate.
- Your employer did not receive an expense report from you.
- In your expense report, there was no information included about the date, time, location, amount, or business purpose of the expense.
- Your employer gave you a flat amount and didn’t require an expense report.
Your per diem will be treated as wages and subject to income tax withholding and payroll taxes if any of the above situations apply. But if you avoid these factors, you will not be taxed on your business travel expenses.
Calculating Taxes On Per Diem
As mentioned, per diem is not subject to income tax. However, if you are receiving a per diem in excess of your actual expenses incurred while traveling for work, your payments will be taxed as wages. This is because the IRS considers per diem taxable when it’s paid in excess of the federal rate.
To calculate the taxable amount, you will first need to determine the federal per diem rate for your destination. You can find this information on the GSA website.
From there, you will need to subtract the federal per diem rate from the total per diem received. The difference is the amount that is considered taxable.
For example, if you receive a per diem of $100 and the federal per diem rate for your destination is $75, the taxable amount would be $25.
You will need to report this amount as wages on your tax return and it will be subject to income tax withholding and payroll taxes. For more information, see IRS Publication 463.
How To File Per Diem On Your Federal Taxes
Form 2106 and Publication 463 describe employee expenses and per diem reimbursement. If you receive a W-2 form from your employer, you can file per diem on your federal taxes. Per diem is an allowance for travel expenses that is not included in your regular wages.
To claim per diem, you will need to complete Form 2106 and attach it to your tax return. Be sure to include all relevant information, such as the dates you traveled and how much per diem you received. For more information to file Form 2106, click here.
As long as the payment equals or is less than the federal per diem rate, per diem payments are not considered wages, and are therefore not taxable. If the per diem payment you receive exceeds the federal per diem rate, you must pay income tax withholding and payroll taxes, since the excess amount is considered wage income.
Your employer will report this amount on your W-2 form. But per diem can’t be used as a salary substitute. Per diem policies cannot be created in such a way that would allow wages to be disguised as something else.
In addition, you will be taxed if you do not file an expense report with your employer. If you are using the meals-only per diem rate, please include the business purpose of the trip, the date and location of the trip, and the receipts for lodging. You must file an expense report within 60 days.
Note: You may not be eligible for tax exemption under the per diem rates if your business-related travel lasts longer than a year in one location, even if it involves multiple separate assignments.
So, it’s best to consult with your tax advisor to avoid unfavorable tax consequences before embarking on an extended business trip.
State Taxes On Per Diem
Each state has its own laws and regulations regarding taxes on per diem payments. Per diem rates are set by the government and vary depending on location. In the United States, there are two types of per diem rates-foreign and non-foreign.
Foreign per diem rates are set by the State Department for locations outside of the continental United States. Non-foreign rates are set by the Department of Defense (DOD) for locations within the continental United States.
Generally, it is best to consult with a tax professional in your state to determine whether such payments may be taxable or not.
Conclusion
So, is Per Diem taxable? The short answer is no, per diem payments are not taxable. However, your payments will be taxed in some cases. If the per diem payments do not exceed the federal maximum, they are not taxable. If the per diem payments exceed the federal limitations, they will be taxed as ordinary income.
A per diem is a reimbursement provided to employees who travel on business. The rates vary based on the area and time of year and are broken down into two categories: lodging and meals and incidental expenses (M&IE).
Tax laws for per diem allowances can be complicated, and per diem rates can change annually. If you have questions or concerns about per diem payment causing you to have taxable income or your company’s per diem policy, be sure to speak with an accountant or tax specialist.