Per Diem Rates by Location, How Taxes Work, and Pros and Cons (2024)

Lodging Expenses

The lodging category covers establishments that offer overnight stays, such as hotels, motels, inns, resorts, and apartments.A separate per diem rate is set for both M&IE and lodging for each location.

For example, for the 2024 fiscal year, the per diem rate for Atlanta is $173 for lodging and $74 for M&IE.

For Chicago, lodging rates range between $213 and $233, depending on the month, and the M&IE per diem is $79.

Per Diem Rates by Location

Per diem rates are based on an area's cost of living.Such rates in large cities, such as Chicago, New York, and Los Angeles are higher than in non-metropolitan areas because goods and services in larger cities are generally more expensive.Lodging rates can also vary by month in response to supply and demand.

The highest lodging per diem in New York City, for example, coincides with autumn, the season that attracts the most tourists and business travelers. Per diem rates are updated annually and become effective October 1, the first day of the federal government’s fiscal year.

Finding Rates for Each Location

Ask your employer's human resources or accounting department for specific rates, or look up the information by visiting the GSA website. There you can search by city, state, or zip code for the current fiscal year (October 1 through September 30).

If you want to view the next fiscal year or any other year since 1997, search by state and select the appropriate year from the drop-down menu.Click "Find per diem rates" to view the results, which are broken down by primary destination, county, maximum lodging by month, and meals and incidental expenses (M&IE).

If you search for an area that isn't covered by GSA tables (e.g., Hawaii, which is not part of the Continental U.S.), two links will appear that will direct you to the appropriate website: the Department of Defense for non-foreign travel (Alaska, Hawaii, Puerto Rico, and Guam) and the State Department for all foreign destinations.

Employer Use of GSA Rates

While most businesses use the per diem rates set by the GSA, they can use alternative reimbursem*nt methods.For example, employers can use the IRS high-low method, which establishes one flat rate per diem for high-cost locations (e.g., New York, Chicago, and the District of Columbia), and one flat rate for all other locations.

Employees are often expected to use the per diem rate to cover their expenses and to keep receipts for any expenses that exceed the per diem rate. In some cases, employees may be required to return any excess funds to the employer.

Employers use GSA rates to help budget for travel. By understanding where certain employees may be traveling in the upcoming year, the company can forecast what their daily expenditure will be once the per diem rates are set early in the year.

Per Diem for Business Travel (Mileage)

Per diem mileage rates are those established by the IRS that taxpayers can use to calculate deductible travel expenses for tax purposes. These rates are used to determine the standard mileage deduction that taxpayers can take for business-related travel using their personal vehicle.

For the tax year 2024, the IRS established a standard mileage rate of 67 cents per mile for business miles driven.

The purpose behind this per diem mileage rate is to reimburse employees who drive their personal vehicle for costs for which they are not otherwise reimbursed.

In addition, it may be unfeasible to calculate the exact amount of depreciation, gas use, oil use, and other overhead cost for every trip. Instead, eligible users can simply use the fixed rate for every eligible mile driven.

Taxes on Per Diem Reimbursem*nts

Per diem payments are not considered wages—and are therefore non-taxable—as long as they meet certain conditions. You will be subject to taxes if any of the following is true:

• Payment is more than the allowable federal per diem rate
• You did not file an expense reportwith your employer
• Your expense report did not include the date, time, place, amount, and business purpose of the expense
• Your employer gave you a per diem and didn't require an expense report

If any of the above situations is true, your per diem will be considered wages and will be subject to income tax withholding and payroll taxes.The amount will be reported by your employer on your W-2 form.If your per diem was above the allowablefederal per diem rate, only the excess amount will be considered wages.

To substantiate your travel and related expenses, you will be required to maintain a log that includes the days you traveled for business, where you went, and the business purpose of the trip.

Trips Lasting Longer Than a Year

Note that if your business-related travel lasts longer than a year in one location—even if it involves two or more separate assignments—you may not be eligible for tax exemption under the per diem tax rules.

To avoid unfavorable tax consequences, consult with your tax advisor before embarking on an extended business trip.

Per Diem As a Salary Alternative

Because per diem payments are non-taxable, some people may raise the question, "Can I accept a lower salary with per diem instead of a higher salary with no per diem?" The answer is no.Per diem policies cannot be created in a manner that allows wages to be labeled as something else—in this case, per diem.

This is because the intention of per diem is not additional compensation but a reimbursem*nt of expenditures. It's assumed that those traveling will need to eat multiple meals per day and spend money on incidentals while they are away from home.

These expenses are not meant to incentivize a worker but rather ensure a safe, healthy standard of living while traveling for work.

Per Diem vs. Stipend

Per diem refers to a daily allowance that an employer pays to an employee to cover their expenses while on a business trip or assignment.

In a very similar manner, a stipend is a fixed amount of money that an employer pays to an employee. A stipend may be paid on a regular basis, such as monthly or weekly, or it may be a one-time payment for a specific project or assignment.

Stipends are often used in academic and research settings. They're usually paid to students or researchers to support their living expenses while they conduct their studies or research.

Although both per diem and stipends may be used to cover living expenses, per diem is more commonly used for expenses away from a home. In addition, a stipend is often a less rigidly calculated figure that simply awards a broad amount to be used for more generic purposes.

Advantages and Disadvantages of Per Diem

Advantages

There are several reasons why companies and individuals may prefer per diem over actual expense reimbursem*nt.

• By using per diem rates, employers can establish a predictable travel budget and avoid unexpected expenses that may arise during business travel. This is especially true for travel set further into the future as per diem may be set for the entire upcoming year.
• Per diem eliminates the need for employees to track and submit receipts for individual expenses. This reduces the administrative burden on both the employee and the employer, and allows the employee to spend more time focused on their business objectives during the trip.
• Also, per diem rates can simplify the tax reporting process for both the employee and employer. Instead of potentially being in non-compliance with non-allowable actual expenses having been reimbursed, it is simply safer and more straightforward.
• Per diem can be seen as a more equitable method of reimbursing employees for their travel expenses. It eliminates the need for them to pay out-of-pocket expenses and wait for reimbursem*nt. In addition, all employees get reimbursed the same amount (assuming they are traveling to the same location).

Disadvantages

Unfortunately, there are also reasons why companies and employees prefer getting reimbursed for actual costs incurred.

• First, per diem rates may not cover all expenses incurred during business travel. This means that employees may need to cover expenses out-of-pocket for anything not covered by per diem but that are still necessary for their trip.
• Because the nature of each employee's travel will be different, companies risk overpaying or underpaying employees as actual costs incurred will rarely if ever be exactly the same as the per diem amount.
• Though per diem rates reduce risk in some areas, they increase risk in others. Employers must ensure that their per diem rates comply with tax regulations and are reasonable based on industry standards. Failure to do so could result in penalties or fines from tax authorities.

The Bottom Line

Per diem payments provide reimbursem*nt to employees who travel for business purposes.Rates vary by location and time of year and are broken down into two categories: lodging and meals and incidental expenses (M&IE).

As long as your payments do not exceed the maximum federal per diem rate, they are non-taxable. If per diem payments exceed federal limits, any excess will be taxed as ordinary income.

Per diem rates may change annually, and per diem tax laws can be complicated.Consult a qualified tax specialist if you have questions or concerns about your company's per diem policy.