Per diem payments are used when businesses have employees that travel. These payments are designed to relieve the employee from certain costs associated with traveling. Particularly meals and incidentals (ground travel, laundry, room service, etc.), and lodging.
This is great for both the business and the employee, but there are certain situations when per diem payments are taxable. In this article, we’ll explore exactly when an employee will pay per diem tax.
Two types
There are two types of per diem payments, meal-only, and meal and lodging. The names imply their use. One pays for meals, the other pays for meals and lodging.
It’s important that we specify the meals must be “non-entertainment related” meals.
Stipulations
As with many parts within the tax code, per diem rules are very specific. Meals and lodging have different rates.
Also, different cities have different rates. These differences are typically relegated to “big cities” and “small cities”, with bigger cities getting the larger rates. This is referred to as the high-low method. Businesses may also make payments based on the state in which you travel.
The per diem payments must be equal to or less than the federal allowable limit (depending on what method is selected). The employee is responsible for filing an expense report within 60 days. The expense report needs to include, date and location of the trip, purpose of the trip, and lodging receipts (if the meal-only option is selected).
You’re not allowed to “transfer credits”. What’s meant by this is if you use less on your lodging than is allotted, you can’t use the excess on food, or vice versa.
Tax Consequences
As I mentioned in the introduction, per diem payments can have tax consequences.
- If per diem payments over the limit are taxable on the employee’s wages
- If an expense report isn’t filed, or the filed expense report doesn’t include the required information, those per diem payments become taxable to the employee.
- If the employer allows you, the employee, to keep whatever you don’t spend.
If you travel for business and receive per diem payments, just make sure you keep good records, and you hang onto your receipts. It’s better to have too much information than not enough.
Related reading:
Some Often Overlooked Tax Deductions for Busines Owners
Top 5 Overlooked Tax Deductions You Should Be Using
Why Financial Literacy is Important
*Be advised: Securities America and its representatives do not provide tax advice. Please consult a tax professional for specific information regarding your individual situation.
Jacob Sensible is a financial advisor with decades of experience in the financial planning industry. His journey into finance began out of necessity, stepping up to support his grandfather during a health crisis. This period not only grounded him in the essentials of stock analysis, investment strategies, and the critical roles of insurance and trusts in asset preservation but also instilled a comprehensive understanding of financial markets and wealth management. Jacob can be reached at: jake.sensiba@mygfpartner.com.