Understanding IRS Publication 1542: Per diem rates and calculations

The IRS created Publication 1542 to provide instructions on managing per diem payments. Although the agency hasn't updated it since 2011, it still offers helpful guidance for staying compliant when reimbursing business travel expenses.

Today, the General Services Administration (GSA) determines per diem rates and policies, though the IRS sometimes provides other policies through annual IRS Notices.

Understanding IRS Publication 1542

IRS Publication 1542 is titled "Per Diem Rates (For Travel Within the Continental United States)." It provides guidance for both employers and employees on how to use per diem rates for business travel expenses without having to track each individual expense.

The purpose of IRS Pub 1542 is to explain:

• Per diem rates
• When you can use these rates to reimburse your employees for travel expenses
• The guidelines for accountable plans, so that reimbursements aren't treated as taxable income for employees
• How this all relates to the GSA's annual per diem rates

Although the IRS has stopped updating Publication 1542, its guidance is still valid for 2025. However, you need to use it with the annual rates published by the GSA. Essentially, it bridges the gap between tax laws and the GSA rate tables.

Costs covered with per diem

Per diem is a Latin term that means "by the day" or "for each day." It's meant to cover the cost of daily meals, incidental expenses, and lodging for business travelers.

Per diem generally covers two categories:

• Meals and incidental expenses (M&IE): Meal per diem covers food and beverage costs for breakfast, lunch, and dinner. Per diem for incidentals covers fees and tips for porters, baggage carriers, and hotel staff.
• Lodging: Lodging rates pay for both hotel stays and short-term rentals. The per diem rate for lodging is based on average daily rate (ADR) data, which reflects the average cost of lodging in a given area.

Expenses not covered by per diem

Per diem doesn't cover every cost associated with business travel. These expenses fall outside the per diem allowance:

• Airfare and other transportation costs
• Rental cars and gas
• Conference and registration fees
• Business-related phone calls
• Entertainment expenses
• Internet access fees
• Laundry or dry cleaning

You'll need to reimburse or track these costs separately from per diem payments.

Why businesses use per diem allowances

Using per diem rates has several benefits for businesses, including:

• Simplicity: Employees don't need to track every single business expense, and your finance team doesn't need to evaluate and process them
• Compliance: If you use an accountable accounting plan, per diem allowances aren't taxable for your employees, which aligns with Publication 1542 and GSA per diem rate guidance
• Cost controls: Per diem rates help you budget better and keep your employees from overspending while traveling

Overall, per diem allowances streamline expense management, ensure tax compliance, and promote cost control, making them a smart choice for business travel policies.

Per diem rates for 2025

IRS Publication 1542 was once the source of truth for annual per diem rates, policies, and best practices. Today, that information is provided by the GSA.

The GSA rates apply to the continental United States (CONUS), and the GSA updates them annually on October 1. While the rates cover costs for federal employees who travel, many businesses use the GSA's per diem rates as the de facto standard. Using the GSA rates will help your business comply with IRS per diem requirements.

Make sure you're working with the correct rates. The 2025 IRS per diem rates aren't the same as the 2024 IRS per diem rates, and so you could be at risk of over- or underpaying your employees or creating issues for your tax returns and potential audits.

The 2025 standard per diem rate is $178, including $110 for lodging and $68 for meals and incidental expenses. As defined in IRS Notice 2025-54, rates for high-cost areas are $86 for meals and incidentals and up to $319 for lodging. Here's an overview of the GSA per diem rates for 2025:

Be sure to review the GSA per diem lookup tool to determine the applicable rate in your locality.

High-cost localities and CONUS rules

For fiscal year 2025, the GSA identifies about 300 non-standard areas with higher per diem rates than the standard rate, including IRS high-cost localities such as New York and San Francisco. These are places where lodging and meal prices are higher than the national average, although those prices can fluctuate seasonally.

Identifying high-cost cities

The IRS and GSA adjust per diem rates based on real-world travel costs, which are often higher for urban areas.

They adjust some per diem rates seasonally. For example, the lodging rate for Boston varies from $209 in January of 2025 to $349 in September 2025 as tourism and business travel demand increase over the calendar year.

You'll find the per-city per diem rates in the GSA per diem lookup tool.

Standard vs. high-low method

You can assign per diem rates for non-standard areas in two ways:

• City-specific rates: This standard method uses the GSA costs for each city and date range. It's the most accurate and is best for companies where employees travel widely across multiple cities. However, this can be time-consuming to track.
• High-low method: The IRS also publishes a high and low cost per diem rate, which isn't specific to certain cities. This method is less precise since it's up to you to decide where cities fall, but it can be easier to administer because it requires less tracking of specific cities and dates on the GSA table. It works best if you often travel to the same places.

Whichever method you choose, you must apply it consistently for the entire calendar year.

Applying the per diem rates

Here's how to apply per diem rates correctly, from daily allowances and reimbursement calculations to avoiding common compliance pitfalls.

Daily M&IE and lodging allowances

Follow these tips to apply daily M&IE and lodging allowances correctly:

• Choose how to track allowances: Always split per diem between lodging and M&IE, but decide whether to record them together as a single daily rate or separately
• Apply partial-day adjustments: On the first and last travel days, reimburse only 75% of the daily M&IE. Lodging is always based on the number of nights stayed.

Let's consider an example. In September 2025, Washington, DC, had a $92 M&IE rate and a $275 lodging rate. Based on the guidance above, here's how you'd calculate per diem for an employee making a multi-day trip to visit a Washington-based customer:

• Full days: $92 M&IE + $275 lodging = $367 per day
• First/last day: $69 M&IE (75% of $92) + $275 lodging = $344 per day

Calculating reimbursements

Use this step-by-step process to calculate per diem reimbursements accurately.

1. Determine the travel destination

Identify where your employee is traveling. To qualify for a per diem reimbursement, travel must be overnight, for a business purpose, and outside the employee's tax home. For trips to multiple locations, calculate separate per diem amounts for each destination.

2. Find the applicable per diem rate

Use the GSA per diem lookup tool to determine the per diem rate based on the city and time of year. Check whether the destination is a standard CONUS location or a designated high-cost locality.

3. Calculate lodging and M&IE separately

Break the total per diem into its two components. Some employers reimburse actual lodging costs while using the flat M&IE rate for meals. Decide whether you're splitting meals and lodging or tracking them as a combined daily rate.

4. Prorate for partial travel days

On the first and last travel days, apply 75% of the daily M&IE rate. This prevents overpayment when employees don't need full meal coverage. Lodging is always based on the number of nights stayed, so no proration is needed there.

5. Add up your totals

Calculate the total reimbursement by adding up each day's per diem, including partial days. That's your final reimbursement amount.

Common mistakes that trigger taxable income

Under certain circumstances, the IRS could consider per diem payments to be taxable income for your employees. Here are the most common pitfalls to avoid.

Paying above the federal rate without substantiation

Don't pay more than the GSA's recommended maximum per diem rates. Any amount above the federal rate becomes taxable wages unless the employee provides receipts proving higher actual expenses.

Missing documentation or receipts

The IRS requires businesses to keep expense reports that show the time, place, and business purpose for per diem expenses. Employees must account for expenses within 60 days after they pay or incur them. Failing to document these details can disqualify the entire reimbursement from tax-free treatment.

Failing to return excess amounts

Employees must return unused per diem advances to the employer. If a trip is shortened or canceled, any unspent per diem needs to come back. Failure to enforce this requirement violates accountable plan rules.

Not prorating partial days

Paying full per diem for travel days (first and last days) when only partial coverage applies can create compliance issues. Always apply the 75% M&IE rule on arrival and departure days.

Tips for streamlining expense reporting

To avoid common expense reporting pitfalls, consider these tips:

• Use automation software: Drive efficiency and reduce human error by bringing on a tool like Ramp to automate expense reporting
• Create a concise policy: A travel expense policy covering rules for per diems, high-low rates for the substantiation method, lodging expenses, and international travel helps keep things consistent across your team
• Communicate your policies: Be sure to train your team on policies such as documentation, per diem eligibility, and handling partial-day costs. A clear policy is only as good as the team using it.
• Conduct regular reviews: Audit your policy, expense reports, and documentation regularly to ensure that there are no non-compliant claims, discrepancies, or guidelines that no longer work for you and your team

Complying with per diem requirements

To stay compliant with per diem requirements, you need to keep proper documentation. The IRS requires businesses to keep expense reports that show the time, place, and business purpose for per diem expenses.

Here's what you should keep records of:

• Travel itinerary, including dates and locations
• Business purpose of trips
• Reimbursement requests with employee information
• Signed T&E policy acknowledgments from your team

In case you're ever faced with an audit, you should also keep records of these forms:

• Travel authorization with pre-trip approvals
• Per diem claim form with travel dates and locations
• Employee expense reports

The best way to manage all this is to implement a standard travel workflow for requests and reimbursements. That way, everyone uses the same process for every trip.

You should also conduct regular internal audits to identify discrepancies and ensure the process and workflow remain relevant to your company.

Updating your travel expense policy

If you're using per diem rates for your travel reimbursements, you need to update your company travel expense policy each year. Your policy provides a consistent and fair way of handling travel expenses, reimbursements, and per diem rates, so that everyone stays compliant with the rules.

When you update your policy, make sure it covers these key elements:

• Per diem method: Specify whether your company uses the standard city-specific method or the high-low method, and apply it consistently for the entire calendar year
• Current GSA rates: Include the new per diem rates published each October 1, with references to the GSA lookup tool for destination-specific amounts
• Partial-day rules: Define how you calculate M&IE on the first and last travel days (75% of the full daily rate)
• Documentation requirements: Spell out what employees need to submit, including travel dates, destinations, and business purpose
• Reporting deadlines: Set clear deadlines for expense reporting and return of excess per diem funds (the IRS requires accounting within 60 days)
• International travel: Clarify that CONUS per diem rates don't apply to international trips, and reference the State Department rates for overseas travel

Automate your per diem policy with Ramp

Managing per diem expenses manually means wrestling with IRS tables, tracking employee travel days, and calculating location-specific rates while ensuring every reimbursement follows federal guidelines.

You're stuck cross-referencing GSA rates for different cities, verifying travel dates against receipts, and hoping your calculations match compliance requirements, all while employees wait for reimbursements and auditors scrutinize every detail.

Ramp's expense management software transforms this complex process through intelligent automation that handles per diem compliance for you. The platform automatically applies current GSA per diem rates based on travel destinations and dates, eliminating the need to look up rates for each city manually.

When an employee submits travel expenses, Ramp instantly calculates the correct per diem allowance using real-time federal rate tables, ensuring every reimbursement complies with IRS regulations without manual intervention.

The system's automated policy enforcement prevents compliance violations before they occur. You can configure per diem rules that match your company's travel policies, such as requiring receipts for expenses exceeding 75% of the federal per diem rate or automatically flagging international travel for additional review.

Real-time reporting gives you complete visibility into per diem spending patterns and compliance status. Ramp's dashboards show per diem expenses by employee, department, and location, making it easy to identify trends and ensure consistent policy application.

The platform maintains detailed audit trails for every per diem calculation and reimbursement, providing the documentation you need for tax compliance and internal audits. This automation doesn't just save time—it eliminates costly compliance errors while reimbursing employees faster.

Simplify your travel expense management

Beyond per diem automation, Ramp Travel streamlines your entire business travel program. Book flights and hotels directly through the platform while enforcing travel policies and capturing negotiated corporate rates.

The integrated experience means travel expenses flow seamlessly into your expense reports with pre-populated trip details and automatic receipt matching. You can even apply custom multipliers to GSA rates, giving employees extra flexibility for high-cost destinations while maintaining spend control.

Try an interactive demo and see how Ramp customers save an average of 5% a year across all spending.