How Can Per Diem Factor Into Your Tax Return?

How Can Per Diem Factor Into Your Tax Return?

How Can Per Diem Factor Into Your Tax Return? If you are familiar with expense reports, you have probably encountered the term “per diem” at some point. Per diem is a fixed amount of reimbursement paid to employees for daily lodging, meals and incidental expenses incurred during business-related travel. However, if you receive per diem, it can impact how you submit your expense reports. Per diem can offer an alternative to reimbursement, and requires less bookkeeping.

United States Per Diem

The United States General Services Administration sets yearly per diem rates for destinations within the Continental U.S. The United States Department of Defense sets yearly non-foreign per diem rates. The United States State Department sets yearly foreign per diem rates. The rates are updated annually and become effective on October 1, the first day of the federal government’s fiscal year. Per diem rates are set by location, and are reflective of an area’s cost of living. Larger cities have higher per diem rates than non-metropolitan areas because it typically costs more to stay there.

Per diem covers meals and incidental expenses. This means all means and room service, laundry, dry cleaning, and fees and tips are covered. Per diem also covers lodging. This means any overnight stays in a hotel, motel, inn, resort or apartment.

When per diem rates are set, there are different rates set for each category. Lodging rates can be nearly two to three times higher than mean and incidental expenses rates.

Does Your Company Have To Use Per Diem Rates?

Businesses are not required to give per diem. They are also not required to use the per diem rates set by the government. Employers have the option of using the IRS high-low method, which provides a flat rate for high-cost areas, and a flat rate for low-cost areas.

Paying Taxes On The Per Diem You Receive

Per diem payments are not considered wages, and are therefore non-taxable, as long as the payment is equal to or less than the federal per diem rate. If you receive a per diem payment that is more than the federal per diem rate, you will be required to pay income tax withholding and payroll taxes, since the excess amount will be considered wages. Your employer should report this to you on a W-2 form. However, don’t think that per diem can be used as a salary alternative. Per diem policies cannot be created in a manner that allows what should be wages to be labeled as something else.

Payments are also taxable if no expense report is filed with your employer. The expense report will need to include the business purpose of the trip, the date and place of the trip, and receipts for lodging, if you are using the meals-only per diem rate. The expense report must be filed with your employer within 60 days.