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Must know tax rules for per diems in the United States
Employers provide a daily allowance or per diem to cover travel expenses like meals, lodging, and incidentals. However, the question that often perplexes employees and employers is: Is per diem taxable?
Unfortunately, the answer isn't a straightforward yes or no. Instead, it depends on how companies pay and track per diems, and if the entire process follows IRS rules.
In this post, we'll explain all the per diem tax rules so you'll know precisely when per diem is taxable, when it's not, and how to handle it at tax time.
What is Per Diem?
Per diem, or "Per diem in Latin, is an allowance employers give employees for work-related travel expenses. It is a flat daily rate paid based on the company's expense policy or the rates set by the IRS, as opposed to reimbursing actual receipts for every meal or coffee.
Is Per Diem Taxable?
Non-taxable: If your employer follows IRS-approved per diem rates and requires you to report the time, place, and purpose of travel.
Taxable: If your employer pays more than IRS limits, doesn't track expenses, or gives per diem as part of regular wages.
Per diem can be tax-free, but only under the right conditions.
IRS Per Diem Tax Rules You Must Know
Per diem is tax-free if:
- The employee is traveling away from their tax home.
- The per diem does not exceed IRS rates.
- The employee submits expense reports with dates, locations, business purpose, etc.
Per diem becomes taxable if:
- The allowance exceeds IRS limits (the excess alone is taxable).
- No proper documentation or reporting is maintained.
- The employee is not traveling (e.g., gets per diem while working locally).
- Per diem is treated like a salary supplement rather than travel reimbursement.
Do You Pay Taxes on Per Diem?
You do not pay taxes on legitimate, IRS-compliant per diem. You pay taxes if per diem is unsubstantiated, excessive, or improperly paid.
Think of it this way- per diem is not a tax loophole, it's a structured reimbursement system.
Does Per Diem Count as Income?
Non-taxable per diem does not count as income.Taxable per diem (excess over IRS rates or without records) does count as income and must be reported on your W-2.
Are Receipts Required for Per Diem?
If per diem rates follow the IRS schedule, no receipts are required, making per diem simpler than traditional reimbursements. However, employees must file an expense report with details such as date, destination, and purpose.
How to Claim Per Diem on Taxes
Employees: You don't usually claim per diem on your personal tax return. Your employer handles reporting.
Self-employed or contractors: You can claim per diem deductions (up to IRS rates) as a business expense on your Schedule C.
Is per diem taxable in Texas?
Per diem taxability follows IRS rules, not state-specific rules. Thus, the same rules apply to all states, including Texas.
Employer's Role in Per Diem Taxes
- Follow IRS per diem rates.
- Collect travel expense reports.
- Treat excess per diem as taxable wages.
- Report taxable per diem on W-2.
How can Zoho Expense help?
If done correctly, per diem is a win-win: easier compliance for employers and tax-free employee benefits. Expense management software like Zoho Expense, with built-in GSA (General Services Administration) per diem rates, makes a real difference.
With Zoho Expense,
- Employees don't need to guess the correct allowance.
- Finance teams don't need to cross-check IRS tables.
- Baked-in compliance ensures per diem remains non-taxable wherever possible.
Zoho Expense handles per diem rules in real time, so employees and employers minimize the risk of errors that could make per diem taxable.
