What is per diem?
Per diem is a daily allowance you give employees to cover travel related business expenses in lieu of paying their actual travel expenses. You give employees a fixed amount of money to cover expenses, including lodging, meals, and incidentals. Per diem can also be limited to covering just meals and incidental expenses.
Employees appreciate per diem because it allows them to travel for business without spending out of their pockets. However, you are not required to provide per diem to employees.
What does per diem cover?
Per diem only covers three types of expenses:
Lodging
Meals
Incidental expenses (e.g., tips)
Employees receive full per diem if they need reimbursement for lodging as well as meals and incidental expenses (M&IE). You can pay employees a lesser per diem rate that only covers meals and incidental expenses (M&IE) if they don't have to pay for lodging.
You can't give employees per diem reimbursement to cover transportation expenses or mileage reimbursement.
Is per diem taxable?
Per diem is not taxable if the payment is equal to or less than the federal per diem rate and the employer receives an expense report from the employee within a reasonable time frame (60 days).
The expense report should include the following information:
Date, time, and place
Amount of expenses
Business purpose
Per diem is taxable if an employee doesn't provide or leaves information out of an expense report, if you give the employee a flat amount and no expense report is required or if you give an employee above the federal per diem rate (only the excess above federal rate is taxable). For taxable per diem, you would include the per diem amounts on the employee's W-2 as wages and applicable taxes should be withheld.
Where
can I find the federal per diem rate?