Is per diem taxable? Rules and tips to follow

If your team travels regularly, providing a per diem allowance for employee expenses is a great way to simplify your expense reporting process. However, it’s important as a business owner to understand the guidelines and requirements from the IRS to make sure per diem payments don’t become taxable income for your employees.

In this article, we define per diem, explain when per diem payments are taxable, and provide best practices for ensuring that per diem payments represent legitimate business expenses.

What is per diem?

The Latin phrase “per diem” means “for each day” or “by the day.” In modern business, per diem is a daily allowance employees use to cover meals, lodging, and incidental expenses.

You can give a per diem allowance to any employee who incurs travel expenses on behalf of your business. Some businesses issue per diem allowances as an advance, or you could have your staff pay out of pocket and receive a per diem reimbursement.

What can per diem cover?

A per diem allowance is meant to cover travel expenses. So employees can use this money for meals, hotel or lodging expenses, and incidentals, up to the limit your company provides.

Is per diem taxable?

Per diem payments generally aren’t considered taxable income to your employees, provided you comply with IRS and other regulations.

Here is a list of guidelines to follow to ensure per diem payments are not taxable income to employees:

1. Use per diem only for the proper expense categories

Strictly speaking, per diem covers only meal costs and incidental expenses (M&IE) and lodging. Incidental expenses include fees and tips for baggage carriers and hotel staff, room service, and miscellaneous expenses like laundry or dry cleaning. Lodging includes hotel stays and short-term rental costs. Per diem should not be used for any other expense categories.

2. Comply with GSA per diem limits

Use the federal government per diem rates provided by the General Services Administration (GSA). These rates are updated annually for the continental United States (CONUS) and vary based on the cost of living in a particular location.

The are two types of per diem rates:

• Standard per diem rate: The standard daily per diem rate for 2025 is $178, including a lodging rate of $110 plus $68 for meals and incidental expenses
• Non-standard areas: For fiscal year 2025, the GSA has identified 296 non-standard areas with higher per diem rates than the standard rate. For example, the daily per diem rate for Los Angeles is $277.

Per diem rates for some high-cost locations—like Boston, New York City, and Chicago—are adjusted seasonally based on tourism and business travel demands.

3. Assign per diem rates correctly

When an employee travels to a particular city, you can use a tool like Ramp's per diem calculator to determine the correct per diem amount for the destination. However, identifying the specific rate for each of the 296 non-standard areas can be time-consuming, especially if your employees travel to varied locations across the continental U.S.

To save time, you can also use the high-low method for per diem rates, which assigns a higher per diem rate to high-cost locations and a lower rate to all other locations. Here are the details:

• The current per diem rates apply from October 1, 2024, to September 30, 2025
• The daily rate for high-cost locations is $319, and the rate for all other locations is $225
• The M&IE rate is $86 for high-cost locations and $74 for all other locations

The IRS publishes a list of high-cost locations, with a date range indicating when high-cost per diem rates apply. The high-low method eliminates the need to manage dozens of different per diem rates.

4. Commit to one per diem method

You can manage per diem payments using the fixed-rate or actual expenses method:

• Fixed-rate method: The employee receives a fixed amount for their per diem allowance for each day of travel and pays the per diem expenses using the allowance
• Actual expenses method: The employee pays the per diem expenses out of pocket, and the company reimburses expenses up to the per diem limit

If you use the actual expenses method, employees must spend personal dollars on per diem expenses and wait for reimbursement, which may frustrate your staff if they wind up having to wait for repayment or if they use their personal credit cards.

5. Document expenses properly

The IRS rules for per diem stipulate that employee expense reports must list the time, place, and business purpose for each per diem expense. Your business should also use an accountable plan for per diem payments.

IRS Publication 463 provides the rules for an accountable plan. Each expense must have a clear business purpose of the trip, and the employee must complete an expense report within 60 days of paying or incurring the expense.

If you follow these guidelines, per diem payments apply to legitimate business expenses, which are not taxable as income to employees.

When is per diem taxable?

We’ve already walked you through the guidance on how to ensure per diem allowances are not taxable. But in what scenarios is per diem taxable income?

Per diem allowances become taxable income in situations where they generate income tax for employees. For example:

• Payments for meals, incidentals, or lodging that exceed the standard GSA rates
• When the employee cannot document a business purpose for an expense
• If expense reports are incomplete or filed past the IRS deadline
• Unused per diem dollars the employee does not return to the employer

In each case, you would need to withhold payroll taxes on the dollar amount, and the payment would then be added to your employee’s wages as taxable income.

Simplify per diem payments with Ramp

A per diem policy can help reduce the busywork of expense reporting and reimbursements, but it can still be a lot to manage. Ramp’s modern finance operations platform helps you save time and improve tax compliance whether you use per diem or another expense reimbursement method.

Ramp Travel pulls in the latest GSA per diem rates for your business travel destinations, helping you manage expenses quickly. With Ramp, you control costs, work more efficiently, and free up employees from the burden of manually creating and approving expense reports. Try Ramp for free and see why customers save an average of 5% a year across all spending.