Posted by KLSM CPA Firm PLLC

Understanding Per Diem and the Impact of Taxation

Understanding Per Diem and the Impact of Taxation

People traveling regularly for business will probably incur costs such as lodging, meal, and other miscellaneous expenses, which brings in per diem payments. This is the reimbursement from the employer to cover such expenses, which are not usually taxable. 

However, your reimbursement rate varies due to many factors. This article sheds light on this. 


Understanding Per Diem?

Per diem is a form of payment employees get as a reimbursement for expenses incurred on a trip like lodging and meals. Self-employed individuals can only use per Diem for meals. The US only applied per Diem to the lower forty-eight CONUS (Continental United States) as released by the GSA (General Service Administration). For Foreign per, Diem rates are set by the state for countries like France, China, Germany, etc. For local trips within US soil (Hawaii, Alaska, and all US states), the Department of Defense controls the rate.

There are conditions in which the per Diem rate will not be added to your wages:

  1. The payment is the same or less compared to the per Diem rate set by the FG.

  2. There was an expense report provided to the employer.

According to Uncle Sam, expense reports must contain the purpose of the trip (related to business), the lodging receipts, and the date alongside the trip's location.


Can Per Diem be Taxed?

You will not pay per Diem on income tax since they will appear on your wages. Per Diem payments will, however, be taxed based on the following conditions:

  • There was no expense report filed with the employer.

  • You filed an expense report, but there were no details like time, place, amount, and purpose of business expenses.

  • You got a flat amount from your employer, removing the need for an expense report

  • Your per diem rate is more than the standard rate set by the federal government.


Per Diem Rates By Location 

Since the cost of living in two places cannot be the same, the Per Diem rate varies as well. The economic cost for things like accommodation, healthcare meals, and taxes varies, directly impacting what one can get as their per diem payment. 

You can confirm the per Diem rates in your vicinity in two ways. 

  • The employer usually has so you can contact him/her.

  • There is also the opportunity to use the Per Diem rate finder from GSA. With this tool, you can search by city, zip code, and state. 


Using Per Diem as an Alternative to Salary 

Since per Diem payments are not subject to tax, it raises the concern that:

Can one opt for a lower salary that includes per Diem rather than a bigger salary without per diem?

The answer is negative since the policy guiding per diem cannot allow funds classified as wages to be changed and labeled as another thing – Per Diem. 


Conclusion 

Provided your trip is business-centered, you might qualify for per diem payments. With such payments, you can take care of expenses you encountered on the journey, like meals, accommodation, and incidental expenses. For people working with a boss, there should be reimbursement for these expenses.

Self-employed people will only get per Diem payments for expenses relating to the meal. Usually, you shouldn't be taxed for these payments, except you did not file a detailed report with your boss. Also, the per diem rate varies based on location.


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