Per Diem Payroll Rules: Accountable Plans, Federal Rates, and Taxable Excess

9/2/2026

A per diem allowance is not taxable wages when it is paid under an accountable plan and does not exceed the federal per diem rate for the place and dates of travel. Payroll treats the amount up to the federal rate as a nontaxable reimbursement, and any amount above it that the employee does not substantiate or return as taxable wages subject to income tax withholding, Social Security, Medicare, and FUTA. Everything else in per diem administration follows from those two rules.

What a Per Diem Allowance Is

A per diem is a fixed daily amount paid to cover lodging, meals, and incidental expenses (M&IE) for business travel away from the employee's tax home, in place of reimbursing each receipt. Employers may pay a full per diem (lodging plus M&IE) or an M&IE-only per diem when the company books and pays for lodging directly.

The IRS defines incidental expenses narrowly: fees and tips given to porters, baggage carriers, hotel staff, and similar service workers. Laundry, dry cleaning, and taxi fares are not incidentals. They are separate business expenses that must be reimbursed and substantiated on their own. Older payroll manuals often get this wrong.

The Accountable Plan Requirements

A per diem only escapes wage treatment if the arrangement is an accountable plan. That requires three things:

1. Business connection. The allowance covers expenses the employee incurs while performing services as an employee, here travel away from home overnight or long enough to need sleep or rest.
2. The employee must account for the time, place, and business purpose of the travel. With a per diem at or below the federal rate, the amount is deemed substantiated, but the dates, location, and purpose still have to be documented.
3. Return of excess. The employee must be required to return any advance that exceeds what was substantiated within a reasonable period.

IRS regulations give a safe harbor for "reasonable period": advances paid within 30 days before the expense, substantiation within 60 days after, and return of any excess within 120 days after. Many employers build those windows straight into the travel policy so nobody has to argue about what "reasonable" means later.

If the arrangement fails any of the three tests, every dollar of the allowance is paid under a nonaccountable plan and is taxable wages.

How the Federal Rates Work

The federal per diem rate for a location is the sum of the lodging rate and the M&IE rate for the place where the employee stops for sleep or rest. The General Services Administration publishes rates for the continental United States; the Department of Defense and the State Department publish rates for non-continental and foreign locations.

The rates change every year on October 1, the start of the federal fiscal year. The current figures are [VERIFY: CONUS standard lodging and M&IE rates effective 1 Oct 2026 — GSA]. Do not hard-code last year's numbers into your payroll system.

Employers have two ways to apply the rates:

• Locality rates. Look up the specific rate for each city or county the employee travels to.
• The high-low method. Use one rate for a short list of high-cost localities and one flat rate everywhere else. The IRS publishes the high-low amounts in an annual notice.

An employer that uses the high-low method for an employee must use it for all of that employee's travel in the calendar year. The annual IRS notice also explains whether the prior rates may be used for October through December; check the notice before switching mid-quarter.

For partial travel days, the federal travel rules allow 75% of the M&IE rate on the first and last day of travel. Employers may use that convention or any other reasonable method, as long as it is applied consistently.

When Per Diem Becomes Taxable Wages

Per diem is taxable, in whole or in part, in these situations:

• The allowance exceeds the federal rate and the employee is not required to substantiate or return the excess. The excess is wages.
• The employee does not return an unsubstantiated advance within the reasonable period. The unreturned amount is wages.
• There is no travel away from the tax home. Per diem paid for local work, or to an employee with no regular tax home (for example, some itinerant workers), is wages.
• The assignment is indefinite. Travel to a single location that is realistically expected to last, or does last, more than one year is not temporary, so allowances for it are wages.
• The employee is a 10% owner of the employer. A lodging-plus-M&IE per diem is not deemed substantiated for related-party employees; they must substantiate actual lodging costs, though an M&IE-only per diem may still be used.
• The plan is not applied consistently, such as paying per diem to some travelers on the same trip and actual costs to others with no policy basis.

Payroll Processing and W-2 Reporting

For an allowance at or below the federal rate, nothing is reported on Form W-2. It is not wages.

When an allowance exceeds the federal rate, payroll splits it:

• The amount up to the federal rate is reported in Box 12 with Code L (substantiated employee business expense reimbursements). Code L is only used when there is also an excess amount.
• The excess is included in Boxes 1, 3, and 5 as wages and is subject to federal income tax withholding, Social Security, Medicare, and FUTA. Treat it as supplemental wages.

Timing matters. The excess should be run through payroll no later than the first payroll period after the travel is substantiated, not batched until year-end. Waiting until December leaves employees under-withheld and creates cleanup work for the year-end payroll checklist.

Mileage is a separate allowance. Reimbursements at or below the IRS business standard mileage rate are nontaxable if the employee substantiates dates, destinations, business purpose, and miles. Amounts above the rate follow the same Code L and excess-as-wages treatment.

State income tax treatment usually follows federal, but some states differ. If employees travel across state lines, confirm state rules as part of your multi-state payroll practices.

Recordkeeping

For each trip, keep:

• The travel dates, including departure and return times if you prorate partial days.
• The locality where the employee stopped for sleep or rest.
• The business purpose.
• The rate table and method (locality or high-low) applied.
• Any advance, the substantiation date, and the date any excess was returned or run through payroll.

Keep these records as long as you keep the related payroll tax records. An IRS examiner reviewing expense reimbursements will ask for them, and a per diem policy that exists only as an email thread does not hold up well. A short written policy stating the method, the rate source, the substantiation deadline, and the return-of-excess rule is the single most useful document you can have.

Frequently Asked Questions

Do employees need receipts for per diem?

Not for the amounts covered by a per diem at or below the federal rate. They still must document the time, place, and business purpose of the travel. Expenses outside the per diem, such as airfare or rental cars, still require receipts.

Can we pay more than the federal rate?

Yes. The excess is taxable wages unless the employee substantiates actual expenses for it. Report the federal-rate portion in Box 12 Code L and the excess in Boxes 1, 3, and 5.

Can we pay per diem for day trips with no overnight stay?

A meal allowance for same-day travel that doesn't require sleep or rest is generally taxable wages, because the employee is not away from home in the tax sense.

Does the rate change mid-year?

Yes. Federal rates reset on October 1, so the rate for a November trip may differ from one in September. Update your rate tables every fall.

Is per diem subject to FUTA?

Only the taxable portion. Amounts paid under an accountable plan at or below the federal rate are excluded from FUTA wages, just as they are from income tax and FICA.

Related Reading and Training

For the broader rules, see payroll tax laws HR teams need to know and avoiding payroll tax penalties. Taxable fringe benefits and reimbursements are covered in the Paycheck Fundamentals training program and the payroll training and certification program.