Per Diem Pay Explained: What It Is, How It Works, and Tax Tips

Per diem pay is a daily allowance that companies give to their employees to cover the costs of business travel. This system was established to make it easy for traveling professionals to pay for their lodging, meals, and other expenses, as it simplifies financial and expense management for the company.

This article explains how per diem pay works, who qualifies for it, and whether this type of pay is taxable. Toward the end, we’ll provide some examples of it, give you the pros and the cons, and show you how to track the expenses even more easily by using Paystub.org’s document generators.

Key Takeaways

• Per diem in Latin means “by the day,” and it refers to a daily allowance that companies provide to their employees to cover their travel expenses.
• It covers lodging, meals, and incidental expenses for employees, but it only covers meals for freelancers and contractors.
• This type of pay isn’t taxable if it doesn’t exceed the rates provided by the U.S. General Services Administration (GSA) and if employees file reports on the date, location, and reasons for their travels.
• Per diem pay won’t appear on your pay stub unless it exceeds the federal rates, at which point it’s considered taxable income.

What Does “Per Diem” Mean?

Per diem is a Latin phrase that means “by the day.” In the context of business expenses, the meaning of per diem pay encompasses a set daily allowance that companies give to their employees when traveling. It’s an alternative to reimbursing an employee for the costs they incurred during their trip and is much more effective.

The main expenses that per diem pay covers include:

• Lodging, which includes temporary accommodation costs, such as staying at hotels.
• Meals, which include breakfast, lunch, and dinner.
• Incidental expenses in the form of additional small amounts of money needed for various fees and services. They can include various fees and tips for service staff, as well as costs for laundry, dry cleaning, Wi-Fi, taxi rides, and more.

However, per diem pay doesn’t cover every expense associated with business trips. For instance, it typically doesn’t include transportation expenses to and from the destination (e.g., airfare).

The idea behind this type of pay is to provide a standardized amount that will cover the necessary living expenses for employees during business trips. The goal is to provide them with needed funds while maximizing efficiency, budgeting, and expense management for the company.

How Does Per Diem Pay Work?

Per diem pay works by providing employees with fixed daily allowances that they can use for their expenses. This is more efficient than having employees collect receipts and show them as proof for reimbursement.

Fixed Daily Allowances

Fixed daily allowances are usually based on guidelines set by the U.S. General Services Administration (GSA). The GSA primarily establishes rates for federal employees, which vary by location due to significant differences in the cost of living.

Private companies frequently use these rates to create their own policies. They are standard for about 2,600 counties in the U.S., and they can be much higher for around 300 high-cost areas.

For example, the standard lodging rate in 2025 is $110, with an additional $68 for meals and incidental expenses (M&IE). This amounts to $178 per diem pay rate, which can go up to $319 for high-cost areas, with M&IE costs going up to $86.

A business can provide a full amount for both lodging and M&IE or just for meals and incidental expenses. This is common when the company pays for its employees’ accommodation directly.

Per Diem vs. Reimbursement

The main difference between per diem and reimbursement is in the necessary documentation and payment structure.

With per diem payroll, employees generally don’t have to submit receipts as proof for every expense. Instead, they are given a set amount to spend each day. They can use these funds, provided they can demonstrate proof of the time, place, and purpose of their business trip during external audits.

This approach reduces the amount of paperwork needed and simplifies the process, as the company’s accounting department doesn’t have to go through each receipt before reimbursing the employee.

On the other hand, when companies reimburse expenses, they require employees to submit receipts and detailed reports of every expense. This gives firms more control over their employees’ spending and helps them repay the exact amount without overspending. The downside is that reimbursement requires a lot more time and administrative work.

Who Qualifies for Per Diem Pay?

Eligibility for per diem pay depends on the professional’s employment status, their reason for travel, and whether they have to stay overnight away from their main place of business (tax home). With that in mind, let’s find out who qualifies for per diem pay.

#1. Employees on Business Travel

The most common recipients of per diem pay are employees who have to travel for business purposes. While this type of payment isn’t legally mandated, many companies utilize it to conduct business and cover the costs of lodging, meals, and incidentals when sending employees on overnight trips.

The per diem pay schedule depends on the policies of individual companies. Some companies give fixed sums to their employees in advance, while others provide company credit cards that they can use for their expenses on the spot.

The expense coverage can also vary. A company can provide full coverage, including lodging and meals and incidental expenses (M&IE), or limit it to only certain areas.

#2. Freelancers and Contractors

Freelancers and contractors handle the per diem pay they receive from clients differently than employees. For starters, these payments are recognized as regular compensation by the IRS, which is why freelancers and contractors need to report per diem income on Form 1099-NEC.

Following that, freelancers and contractors can deduct their travel expenses on their Schedule C (Form 1040). To do this, they need to keep detailed records of their costs as proof.

Generally, you can only deduct your meals and incidental expenses (M&IE) based on the federal per diem rates. You can’t include lodging in your per diem pay as a freelancer or independent contractor.

Still, per diem tax rules and implications for freelancers can be complex and vary from one individual to another. That’s why it’s critical to consult a tax professional to get a definitive answer.

#3. Per Diem Rules for the Self-Employed

Self-employed professionals can leverage per diem pay with one limitation: they can only deduct the cost of meals and incidental expenses. They can’t use the lodging portion of the per diem pay.

On top of that, they need to keep receipts and records of all the expenses to substantiate the dates, locations, and business reasons for their travels. Finally, they need to be traveling away from their tax home to be eligible for per diem pay.

Is Per Diem Pay Taxable?

Per diem pay isn’t taxable as long as you comply with the IRS and other relevant regulations.

Here are the steps you should take to ensure you don’t incur taxes on your per diem pay:

• Only use per diem for expenses that it covers, which include lodging, meals, and incidentals.
• Comply with the limits imposed by the GSA. In 2025, the limits are $178 per day for regular areas and up to $319 per day for high-cost areas. Some areas can have their rates adjusted based on the season, too.
• Document your expenses to show the time, place, and purpose of your trip. You must also complete and file an expense report within 60 days of finishing your trip.

If you follow these guidelines, your per diem pay won’t be taxable, as it will be considered a legitimate business expense.

However, you will likely incur taxes on your per diem pay if you:

• Spend more than the GSA limit on your lodgings, food, and incidentals
• Don’t document your expenses, and aren’t able to show the proof of your trip
• Don’t submit an expense report on time
• Don’t return the unused per diem funds to the employer, but keep them for yourself

Per Diem Pay Examples

Let’s see a couple of examples of per diem pay, starting with an example for an employee:

• The employee is going on a three-day business trip.
• The employee is traveling to a regular-rate area, with a daily limit of $178.
• The company is covering the employee’s flight expenses separately.
• The employee receives a total of $534 as their per diem pay, which is three times $178.
• The employee spends all of it, but doesn’t need to provide receipts to the company.
• Within 60 days of returning from their trip, the employee files a report outlining the dates, location, and purpose of their journey.
• Since the employer spent the amount that’s within the GSA rates, their per diem pay isn’t taxable.

Now, here’s an example for a contractor:

• The contractor is going on a week-long business trip.
• The client agrees to cover their meal expenses for seven days at a rate of $68 per day.
• The contractor receives a total of $476 as their per diem pay, which is seven times $68.
• The contractor spends it all but doesn’t need to provide receipts to the client.
• The contractor reports their expenses on Schedule C and is not taxed on them.

Pros and Cons of Per Diem Pay

Now that you understand the per diem pay and how it’s used in different situations, let’s explore some of its key benefits and drawbacks.

Pros of Per Diem Pay

Let’s start with the biggest pros of per diem pay:

• Simplicity. Employers who utilize per diem pay don’t have excessive paperwork to deal with when collecting numerous receipts for verification. This simplifies and speeds up expense reporting and payroll processing.

• Budgeting predictability. Since businesses know travel costs in advance, they can make more accurate financial forecasts.

• Convenience. Employees can enjoy the convenience of having the funds available upfront without having to keep a meticulous track of every receipt.

• Moderation and efficiency. By knowing upfront how much money they will receive, employees can budget for that sum and be mindful of their spending.

Cons of Per Diem Pay

Now, let’s see some of the main cons of per diem pay:

• Potential for unfairness. A standard rate might not be fair in every situation. Some trips may require employees to spend more than their per diem pay, even if they don’t travel to high-cost areas.

• Risk of overpayment. If an employee doesn’t spend all of their per diem allowance, they can retain the unused amount and avoid taxation on it, potentially costing the company more than necessary.

• Less detailed expense tracking. Since employees aren’t required to provide receipts to show their expenses, companies often lack sufficient insight into their spending.

• Discourages potentially necessary spending. Because employees have a fixed sum to work with, they may avoid expenses that could be beneficial for the company, such as dinners with potential clients.

How to Track Per Diem Pay on Pay Stubs and 1099s

If you’re an employee who receives per diem pay within the GSA-imposed rates, you likely won’t see it on your pay stub. Since this income isn’t subject to tax withholding or payroll tax, there’s no need for it to appear on your pay stub. Moreover, the income won’t appear on your Form W-2, either.

However, if your per diem pay exceeds the federal rate (or you don’t file an expense report), the excess or the full amount is considered taxable income and will appear on your pay stub in the earnings statement. It will also be reflected on your Form W-2.

If you’re a contractor, per diem income will be reported on 1099 forms as regular income. After that, it’s your responsibility to track these expenses, keep the necessary documents as proof, and deduct them on your tax return (Schedule C) to reduce taxable income.

If you want to simplify record-keeping as a small business, freelancer, or independent contractor, consider using our software for document creation. We offer both a pay stub generator and a Form 1099 generator, allowing you to quickly and easily create professional documentation.

Final Thoughts

Per diem pay is a convenient way for businesses to ensure their employees have the necessary funds during business trips. They don’t add complexities to the companies’ administrative processes and offer a degree of predictability when it comes to budgeting.

However, it’s essential to adhere to the guidelines set by the GSA and rules imposed by the IRS to avoid running into tax issues and unexpected liabilities. That’s why it’s crucial to stay informed about the latest rates and ensure that you file your reports on time, providing the necessary information on trip dates, locations, and purposes.

Per Diem Pay FAQ

#1. What’s the current IRS per diem rate?

The current IRS per diem rate is $319 to travel to a high-cost locality and $225 to travel to any other locality within the continental United States. This includes $86 for meals and incidental expenses (M&IE) for high-cost areas and $74 for M&IE in the other regions.

#2. Can employers pay less or more than the standard rate?

Yes, employers can pay less or more than the standard per diem rate. However, if they pay more than the federal rate, the excess is considered taxable income and should be reported if they spend it. If they return it, they won’t have to pay taxes on it.

#3. Is per diem included in gross income on pay stubs?

Per diem is not included in gross income on pay stubs if it’s below or at the federal rate. However, if an employee receives more than the federal rate and doesn’t return it, that amount is taxable and must be included.

#4. How do I claim per diem as a freelancer?

As a freelancer, you claim per diem by listing it as any other income from the client. You can then deduct meals based on the M&IE per diem rate for the location. What you can’t do is include lodging in per diem pay as a freelancer or independent contractor.