Per Diem Tax Rules: When Is It Taxable?

The two plan types

What is the difference between accountable and non-accountable per diem plans?

The IRS draws a bright line between two types of expense reimbursement arrangements. This classification determines whether your per diem is tax-free or taxable.

Accountable plan (tax-free per diem)

An accountable plan must satisfy three requirements under IRS regulations (IRC Section 62(c) and Treas. Reg. 1.62-2):

1. Business connection: The expense must be incurred in connection with the employer’s business while the employee is traveling away from their tax home.
2. Substantiation: The employee must substantiate the time, place, and business purpose of the travel. When the employer uses the federal per diem rate, receipts for meals are not required — only the dates, location, and business purpose.
3. Return of excess: Any per diem paid above actual expenses (or above the federal rate) must be returned to the employer within a reasonable time.

When all three conditions are met and the per diem does not exceed the GSA rate for that location, the payment is excluded from wages entirely. It does not appear on the employee’s W-2, is not subject to income tax withholding, and is not subject to FICA.

Non-accountable plan (fully taxable)

If any of the three conditions above is not met, the arrangement is treated as a non-accountable plan. The entire per diem amount becomes taxable wages: it is included in the employee’s W-2 Box 1 and is subject to federal income tax withholding, Social Security (6.2%), and Medicare (1.45%).

Common situations that trigger non-accountable treatment:

• The employer pays a flat daily allowance with no requirement to substantiate business purpose
• The employee is not required to return unspent funds
• The arrangement lacks a clear business connection (such as a flat stipend regardless of travel)

What happens when per diem exceeds the federal rate?

Even under an accountable plan, per diem above the GSA rate for the travel location is taxable. The employer must include the excess in the employee’s wages and withhold taxes on it. The portion at or below the rate remains tax-free.

For example, if the GSA M&IE rate for a city is $69 per day and your employer pays $90 per day, the $21 excess is taxable income. The remaining $69 is excluded from wages.

Federal per diem rates are published by the GSA and updated each fiscal year (October 1). Rates vary significantly by location. To look up the rate for your travel destination, visit gsa.gov/perdiem. The site also provides a per diem calculator to estimate allowances.

How does per diem interact with the TCJA employee deduction suspension?

Before 2018, W-2 employees who received no per diem (or taxable per diem) could deduct unreimbursed travel expenses as a miscellaneous itemized deduction subject to the 2% AGI floor. The Tax Cuts and Jobs Act suspended this deduction for tax years 2018 through at least 2025. This makes the accountable plan distinction even more important for employees — if your per diem is taxable, you generally cannot offset it with an employee travel deduction on your federal return.

Self-employed workers are not affected by this suspension. Independent contractors and sole proprietors can deduct actual travel expenses or use the federal per diem rate (for meals only) on Schedule C, reducing both income tax and self-employment tax. See the self-employment tax calculator for details.

Worked example: accountable plan with partial taxable excess

A consulting firm sends an employee to New York City for a 5-day project. The GSA rate for NYC (illustrative) covers lodging and $79/day for M&IE. The firm pays actual lodging plus a $100/day M&IE allowance under an accountable plan. Here is how the tax treatment breaks down:

The $105 excess appears on the employee’s W-2 Box 1 and is subject to income tax withholding and FICA. The $395 at-rate portion and the lodging reimbursement are tax-free and do not appear on the W-2.

Illustrative example. Actual GSA rates vary by city and fiscal year — always verify the current rate at gsa.gov/perdiem for your specific travel destination.

Special rules for transportation workers

Truck drivers, airline crew, railroaders, and other workers subject to DOT hours-of-service limits qualify for a special M&IE rate. Self-employed transportation workers using the per diem method on Schedule C are allowed to deduct a higher percentage of the M&IE rate (historically 80% vs. the standard 50% meal deduction limit, though this limit has changed under the TCJA and subsequent legislation — verify the current rate in IRS Publication 463 for the relevant tax year).

For W-2 transportation employees, the same accountable/non-accountable distinction applies. Many trucking companies use accountable plans that reference DOT logs for substantiation, making the per diem tax-free up to the federal rate.