Per diem payments are generally not taxable income, provided they don't exceed federal rate limits and follow IRS accountable plan rules. The employee must also submit an expense report confirming the time, place, and business purpose of the trip. Whether you're an employer setting travel policies or an employee receiving daily allowances, the tax treatment depends on how you structure and document these payments.

Per diem covers meals, lodging, and incidental expenses during business travel. When payments stay within General Services Administration (GSA) rates and meet IRS documentation requirements, they remain tax-free for employees and deductible for employers.

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 (such as tips for hotel staff, room service charges, and laundry or dry cleaning fees) 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 are not taxable income as long as they meet IRS requirements under an accountable plan.

Per diem payments generally aren't considered taxable income to your employees, provided you comply with IRS and other regulations. One important threshold: per diem only applies to travel requiring sleep or rest away from the employee's home or regular work location. Without an overnight component, the IRS typically treats day-travel per diem as taxable income.

Follow these guidelines to keep per diem payments non-taxable for employees:

1. Use per diem only for the proper expense categories

Strictly speaking, per diem only covers meals 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 2026 is $178, which includes a lodging rate of $110 plus $68 for meals and incidental expenses
• Non-standard areas: For fiscal year 2026, 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.

Foreign per diem rates are set by the Department of State and updated monthly. Per diem rates for Alaska, Hawaii, and U.S. territories are set by the Department of Defense.

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 use the high-low method instead. It assigns a higher per diem rate to high-cost locations and a standard rate everywhere else. The current per diem rates apply from October 1, 2025, to September 30, 2026:

• 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. Employees must also return any excess per diem (amounts received above what was substantiated) to the employer within 120 days.

These two timeframes, 60-day reporting and 120-day return of excess, are the core requirements of an IRS accountable plan.

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
• Long-term assignments—if a temporary work assignment in a single location exceeds one year, the IRS considers it the employee's new tax home. Per diem payments then become taxable income.

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.

Per diem for contractors and self-employed workers

Contractors can receive non-taxable per diem payments, but only if the arrangement meets the same IRS accountable plan requirements that apply to employees. The plan's structure determines the tax treatment.

Under an accountable plan, contractor per diem follows the same non-taxable rules as employees. There must be a business connection, the contractor must provide adequate accounting within 60 days, and they must return any excess per diem within 120 days. Under a non-accountable plan, per diem is fully taxable and reported as wages on Form 1099-NEC.

Self-employed individuals face additional limitations. You can't use per diem lodging rates at all; you must track actual lodging expenses with receipts. You can use the M&IE per diem rates, but you can only deduct 50% of meal costs. Report the deduction on Schedule C.

For contractors under a non-accountable plan, per diem payments are included in nonemployee compensation on Form 1099-NEC.

Can employers deduct per diem?

Per diem payments are generally tax-deductible as long as they follow IRS accountable plan rules.

Keep clear records showing the business purpose, destination, and dates for each trip. Using GSA rates or the high-low method helps demonstrate the amount was reasonable if you're audited.

If documentation is incomplete or the per diem exceeds federal limits without justification, the excess may not be deductible. The IRS could also reclassify the payment as taxable wages.

Review the guidelines in IRS Publication 463, which covers travel, gift, and car expenses in detail.

You can generally deduct 100% of lodging per diem payments, but only 50% of the M&IE (meals and incidental expenses) portion. This split applies whether you use GSA rates or the high-low method.

Self-employed individuals can't use per diem rates for lodging deductions. You must keep track of actual lodging expenses. You can use M&IE per diem rates, but you're also subject to the 50% meal deduction cap. In practice, the actual expense method often involves similar paperwork for business owners, since you don't need receipts for meals under $75 anyway.

How to keep per diem non-taxable and compliant

Following a few consistent practices keeps per diem payments non-taxable and audit-ready.

• Meet the IRS's documentation requirements (time, place, and business purpose) for 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

A clear, consistent process prevents tax issues and reduces friction during reporting or audits.

Enforce per diem policy automatically with Ramp

Ramp's expense management platform automates per diem capture, coding, and policy review, so your team never has to file a manual expense report for travel meals or lodging.

Ramp lets you set custom per diem rates by location that align with IRS guidelines, eliminating the guesswork around allowable amounts. Policy Agent, Ramp's always-on AI reviewer, enforces your per diem policy before spend happens. If an employee's expense exceeds the configured per diem limit for their destination, Policy Agent flags it in real time rather than after the fact.

The platform automatically separates per diem payments from other travel expenses and creates clear audit trails that satisfy IRS documentation requirements. If an employee traveling to New York submits expenses, Ramp applies the correct M&IE and lodging rates and keeps each component properly classified and within federal limits.

Ramp's dashboards show you per diem spending by employee and destination, with policy compliance flagged automatically. 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.

Try an interactive demo to see how Ramp helps finance teams reclaim 4–5 hours a week on expense reviews.