Is per diem considered taxable income? IRS guidelines and how to stay compliant

If your team travels for business regularly, providing a per diem allowance is a great way to simplify your expense reporting process. However, business owners must understand the IRS guidelines and requirements around per diem so that these payments don’t become taxable income for employees.

In this article, we define per diem, what it covers, and who uses it. Plus, learn when per diem is taxable and how to stay compliant.

What is per diem?

The Latin phrase per diem means “for each day” or “by the day.” In modern business, per diem refers to a fixed daily allowance employers provide to employees to cover meals, lodging, and incidental expenses during business travel.

You can offer a per diem allowance to any employee who incurs travel expenses on behalf of your business. Some businesses issue per diem allowances in advance, while others have employees pay out of pocket and receive a per diem reimbursement.

What does per diem cover?

A per diem allowance is meant to cover expenses related to business travel. Employees can use the funds for meals, lodging, and incidental expenses up to the limit your company allows. Many companies set their per diem rates based on the annual benchmarks published by the General Services Administration (GSA).

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's a list of guidelines to follow to ensure per diem payments are non-taxable income for employees:

1. Use per diem only for the proper expense categories

Strictly speaking, per diem only covers meal 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. Stay within GSA per diem limits

Use the per diem rates published by the GSA for travel within the continental United States (CONUS). These are updated annually and vary by location and season.

There are two types of per diem rates:

• Standard per diem rate: The standard per diem rate for 2025 is $178, which includes 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, such as Boston, New York City, and Chicago, are adjusted seasonally based on tourism and business travel demand.

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. The current per diem rates apply from October 1, 2024, to September 30, 2025:

• Daily rate: $319 for high-cost locations; $225 for all other locations
• M&IE rate: $86 for high-cost locations; $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 is useful because it 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 your 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. This may frustrate your staff if they have 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 considered 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 that 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.

Can employers deduct per diem?

In most cases, per diem payments are tax-deductible for businesses as long as they’re handled correctly. The IRS allows businesses to deduct these travel expenses, but only if the payments follow the rules laid out in an accountable plan.

That means your team needs to keep clear records that show the business purpose of the trip, where the employee went, and when the expenses were incurred. Using GSA rates or the high-low method helps support that the amount was reasonable, which makes it easier to defend in case of an audit.

If the documentation is incomplete or the per diem amount goes over the federal limits without proper justification, the excess might not be deductible. Worse, the payment could be treated as taxable wages, creating more work at tax time.

To stay on the safe side, it’s a good idea to review the guidelines in IRS Publication 463, which covers travel, gift, and car expenses in detail.

How to keep per diem non-taxable and compliant

A strong per diem policy makes life easier for everyone. Your team gets clear guidance, and your business stays on the right side of the IRS. Here are a few ways to keep things running smoothly:

• Stick to IRS rules for documenting the time, place, and business purpose of each trip
• Use the GSA rates or the high-low method to keep payments within acceptable limits
• Only go above standard rates if there's a valid business reason, and make sure to track it properly
• Make sure employees understand what per diem covers and what it doesn’t to avoid misuse
• Create a simple checklist or template employees can use when submitting expense reports

Keeping your process clear and consistent helps prevent tax issues and cuts down on back-and-forth during reporting or audits.

How Ramp simplifies per diem compliance and tracking

Managing per diem payments while maintaining IRS compliance is a constant balancing act. You're tracking daily allowances across multiple employees and locations, ensuring payments stay within federal limits, and documenting everything properly to keep these payments non-taxable—all while trying to process reimbursements quickly enough to keep your traveling employees happy.

Ramp's expense management software transforms this complex process through automated policy enforcement and real-time tracking. The platform lets you set custom per diem rates by location that automatically align with IRS guidelines, eliminating the guesswork around allowable amounts. When employees submit expenses, Ramp instantly validates them against your configured per diem limits and flags any amounts that exceed the non-taxable threshold.

The system's intelligent categorization automatically separates per diem payments from other travel expenses, creating clear audit trails that satisfy IRS documentation requirements. For instance, if an employee traveling to New York submits their expenses, Ramp automatically applies the correct M&IE and lodging rates, keeping each component properly classified and within federal limits. Any amounts exceeding these thresholds are immediately flagged for review and potential tax treatment.

Real-time visibility into per diem spending helps you catch compliance issues before they become problems. Ramp's dashboards show you which employees are receiving per diem payments, their travel destinations, and whether payments remain within non-taxable limits. The platform maintains detailed records of all per diem transactions, including dates, locations, and business purposes—everything the IRS requires to substantiate these payments during an audit.

Streamline travel booking with Ramp

Beyond just per diem management, Ramp Travel simplifies your entire business travel program. Employees can book flights, hotels, and transportation directly through Ramp while your policies work behind the scenes to control costs.

The platform automatically flags out-of-policy bookings before they happen and matches all travel expenses to the correct trip. Whether your team books through Ramp or external platforms, every expense flows seamlessly into your accounting system with the right approvals and categorization already complete.

Ready to modernize your travel and expense management? Try an interactive demo to see how Ramp saves finance teams hours each week.