Is per diem taxable? IRS rules for employers and employees

Per diem payments are generally not taxable income, provided they don't exceed federal rate limits and follow IRS accountable plan rules. For fiscal year 2027, that federal limit is $181 a day in most of the continental U.S., or more in 295 higher-cost areas. 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.

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.

The rest requirement means the trip has to keep your employee away from their tax home substantially longer than an ordinary workday. When the allowance stays at or below the federal rate, it's also "deemed substantiated," so employees don't need a receipt for every meal.

So is per diem taxed? Not when it follows IRS accountable plan rules and stays within federal rates.

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. For a walkthrough of how the rates are calculated, see this guide to IRS Publication 1542 per diem rates.

There are two types of per diem rates:

• Standard per diem rate: The standard CONUS per diem rate for fiscal year 2027 (October 1, 2026, to September 30, 2027) is $181: a $113 lodging rate plus $68 for meals and incidental expenses.
• Non-standard areas: For fiscal year 2027, the GSA has identified 295 non-standard areas with higher per diem rates than the standard rate. For example, the daily per diem rate for Los Angeles is $285 ($199 lodging plus $86 M&IE), according to GSA's FY2027 per diem rates file.

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 295 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 high-low rates apply from October 1, 2026, to September 30, 2027 (IRS Notice 2026-60):

• Daily rate: $329 for high-cost locations; $230 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.

The IRS recognizes two main rate methods for substantiating per diem: the federal per diem rate method, which uses GSA locality rates (or an M&IE-only version of it), and the high-low method. Once you pick one for an employee, stick with it. Under Rev. Proc. 2019-48, once you use high-low for an employee, you must use it for all their CONUS trips through year-end.

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.

Accountable vs. nonaccountable plans

An accountable plan is what keeps per diem tax-free. Under a nonaccountable plan, every dollar of the allowance is taxable wages, the same rule that governs whether employee reimbursements are taxable.

To qualify as an accountable plan, your reimbursement arrangement has to meet three requirements:

1. Business connection: The employee must incur the expenses while performing services as your employee.
2. Adequate accounting: The employee must account for the expenses to you within a reasonable period of time.
3. Return of excess: The employee must return any amount above what they substantiated within a reasonable period of time.

Miss any of the three, and the IRS treats the plan as nonaccountable. So is per diem tax free? Only when your plan meets all three tests.

When is per diem considered taxable income?

Per diem becomes taxable income when it exceeds federal rates or falls outside accountable plan rules. Under Rev. Proc. 2019–48, an allowance at or below the federal rate is deemed substantiated, so employees can keep unspent amounts tax-free. Your employee still has to document the time, place, and business purpose of the trip.

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 above the federal rate that the employee does not return to the employer
• Long-term assignments—if a work assignment in a single location is realistically expected to last more than 1 year, the IRS treats it as indefinite, and that location becomes 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.

Is per diem taxable income in full when the allowance exceeds the federal rate? No. If your employee substantiates the trip but doesn't return the excess, only the amount above the federal rate is taxable.

Say you pay an employee $250 a day for a trip to a location where the high-low rate is $230. The $20-a-day excess is taxable wages unless the employee returns it.

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, the contractor gives the client adequate records of their travel expenses, and the client reimburses them or pays an allowance. Under a nonaccountable plan, per diem is fully taxable, and the client reports it as nonemployee compensation on Form 1099-NEC.

If you're self-employed, you face additional limits. You can't use per diem lodging rates at all, so 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, and you can't use the high-low method. Report the deduction on Schedule C.

So do you pay taxes on per diem as a self-employed worker? You don't pay tax on legitimate business travel expenses you deduct, but you'll still need receipts for lodging and any expense of $75 or more.

Can employees deduct unreimbursed per diem?

As an employee, you generally can't deduct unreimbursed travel expenses on your federal return. The miscellaneous itemized deduction for unreimbursed employee expenses remains suspended, according to IRS Publication 463.

The exceptions are narrow: Armed Forces reservists, qualified performing artists, fee-basis state or local government officials, and employees with impairment-related work expenses. If you're covering travel costs yourself, ask your employer to reimburse you under an accountable plan. That's the only way most employees can recover those costs tax-free.

Can employers deduct per diem?

Per diem payments are generally tax-deductible for employers 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 IRS can reclassify the excess 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.

Transportation workers are the exception. If an employee is subject to the Department of Transportation's hours-of-service limits, you can deduct 80% of M&IE instead of 50%. Notice 2026–60 also sets special transportation-industry M&IE rates: $80 for CONUS travel and $86 for travel outside CONUS.

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 your per diem policy automatically with Ramp

Per diem stays tax-free only when you enforce your policy and every trip is fully documented. Manual review makes both harder, and one missing receipt or late submission can make an allowance taxable.

Ramp's expense management software removes the expense report workflow entirely. Receipt capture, coding, and review happen automatically, so your team stops chasing paperwork after every trip.

• Flexible receipt capture: Employees submit receipts by SMS, mobile app, email, Slack, or Teams. Ramp codes each expense from context.
• Always-on review: Policy Agent is an always-on AI reviewer trained on your real policy. It reviews every transaction and routes only genuine exceptions to you.
• Real-time sync: Coded expenses sync to your ERP in real time, so your books stay current without manual entry.

Policy Agent catches 7x more out-of-policy spend than traditional rule-based flags. Your managers don't have to play bad cop or remember every policy rule.

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