You just got told you’ll be traveling for work and that you’re “on per diem.” Or maybe you’re building a travel policy for the first time and have no idea what a reasonable daily allowance looks like. Either way, you’re in the right place.
Per diem is a set amount of money that your company provides you on a daily basis to compensate for your meals, accommodation, and other minor costs during company travel.
Companies do not require employees to provide a receipt for each meal and cab ride, but charge them a fixed rate each day and allow employees to spend the money within it. It is easy to say, and in general it is, but there are IRS regulations, federal rate standards, and some cases that confuse people.
This guide covers all of it: what per diem means, what it covers, whether it’s taxable, how to calculate it for any US city, and how companies should set it up correctly.
What Is Per Diem?
In business travel, it is a fixed daily allowance that your employer gives you to pay for three classes of expenses when you are away at work, that is, meals, lodging, and incidentals.
Your company does not require you to keep track and file separate receipts for each item, but rather it provides you with a fixed amount of money per day, and you operate within that.
There are three expense categories that per diem is meant to address, as stipulated by the IRS:
- Meals and incidentals (M&IE): Breakfast, lunch, dinner, and minor incidentals such as tips to hotel employees, baggage carriers, and laundry expenses. The IRS lumps them into one daily rate known as M&IE.
- Lodging: Hotel accommodation, or serviced apartments and inns, wherever you will sleep on a work trip. Lodging is not reimbursed in the same way as meals: you receive the actual cost up to a daily limit, and not a fixed amount.
- Incidentals: Already factored in under M&IE, but it is worth mentioning separately, these are the little miscellaneous expenses each day, other than food, which are added up on longer journeys.
What does per diem NOT cover?
Transportation is not covered by per diem. Flights, rental cars, local transit, and mileage are addressed separately, either through direct company billing, corporate card, or a separate mileage reimbursement claim. If your employees drive for work in California, for example, state law has specific requirements around how those mileage costs get reimbursed that operate independently of per diem.
Per diem does not include alcohol, personal entertainment, or any other activities that are not in line with the purpose of the trip. If a company’s policy is silent on alcohol, employees generally interpret that as a yes, which is worth clarifying.
Is “per diem employee” the same thing?
No. An employee who is employed on a day-by-day basis, such as a substitute teacher, a healthcare float nurse, or event staff, is called a “per diem employee”. That’s a completely different use of the term. This blog covers per diem travel allowances only.
Is Per Diem Taxable?
This is the question that brings most people here. The short answer: per diem is not taxable income, but only if three conditions are met.
Per diem payments are excluded from an employee’s wages when:
- The reimbursement is not in excess of the federal rate of per diem applicable to that place.
- The employee files an expense report within 60 days of the trip.
- The expense report captures business purpose, dates of travel, and destination.
When all three conditions are satisfied, the arrangement qualifies as an “accountable plan” under IRS rules. Nothing shows up on the employee’s W-2, and neither the employer nor the employee pays tax on the per diem amount.
What exactly does an accountable plan require?
There are three conditions of an accountable plan: the travel should have a valid business purpose, the employee should be able to prove the expenses with simple documentation (no full receipts need to be presented, just dates, place, and purpose of business), and the sums that were paid more than the rate should be refunded within a reasonable time.
The 60-day window is firm. If an employee submits their expense report on day 61, the payment becomes taxable. This is one of the most common compliance gaps in small and mid-size companies that manage per diem informally.
What happens when per diem exceeds the federal rate?
If your company pays a rate higher than the federal rate charged by the U.S. General Services Administration to a city, the difference is taxable. It should be included in the employee’s W-2 as salary.
To illustrate, when the rate approved is $178 per day, and you pay 220, the additional amount of 42 is taxable income. It is not permitted to pay higher than the federal rate. This is done by many companies in costly cities. You only have to manage the additional amount properly in the payroll in order to save trouble in the future.
Furthermore, as per diem is not considered as a form of wages, it is not included in the retirement contributions, overtime compensation, and social security benefits. To the majority of employees, this is not a big difference. However, in the trucking or aviation industry, where per diem may represent a significant portion of income, one should know how this will impact overall income.
How Does Per Diem Work for Business Travel?
The day-to-day process is simpler than it looks. Before the trip, the company establishes the per diem rate for the destination. The employee travels and spends within those limits. After the trip, they file a brief expense report; no receipt book required for meals.
Here’s the standard flow:
- Before travel: Finance or HR looks up the GSA rate for the destination city and communicates the daily allowance to the employee. Some companies issue a cash advance; others use a corporate card with preset limits; others reimburse after the trip.
- During travel: The employee uses the per diem for meals and incidentals, collecting hotel receipts for lodging. For meals, no receipts are needed as long as spending stays within the daily rate.
- After travel: The employee submits an expense report within 60 days documenting business purpose, travel dates, and destination. Lodging receipts are attached. Meal receipts are not required.
How does the first and last day of travel rule work?
On the first and last day of a business trip, employees receive 75% of the standard M&IE rate, not the full daily amount. The rationale is that travel days involve fewer meals than a full day at the destination.
So if the M&IE rate is $80/day, day one and the final day pay $60 each. The middle days pay the full $80. Lodging is not affected by this rule; you’re reimbursed for the actual nights you stayed.
Can you keep the leftover per diem?
Yes, in most companies. The IRS has no rule requiring employees to return unused per diem amounts. If you stayed at a cheaper hotel or ate inexpensively and came in under budget, the difference is yours in most policies.
Some companies have explicit “return unused amounts” policies, which is also legal. The problem is when companies have no written policy at all, managers handle it differently across teams, employees find out inconsistently, and the frustration is completely avoidable. If your policy doesn’t address this in writing, it should.
What Are the Current Per Diem Rates in the US?
Every year on October 1, the General Services Administration (GSA) publishes per diem rates for every county in the continental United States. These are the benchmark most private companies use, not because they’re legally required to, but because aligning with the GSA rate keeps reimbursements tax-free and gives finance teams a defensible anchor.
The 2026 standard CONUS rate is $178/day, $110 for lodging, and $68 for M&IE. This applies to the majority of US locations. Cities with higher costs of living get their own “non-standard area” (NSA) rates, which can be significantly higher and sometimes vary month to month within the same city.
A few examples of how city rates differ from the standard:
- Washington DC has one of the highest lodging rates in the country, well above the $110 standard. For the full DC rate breakdown and how it applies in practice, see the current Washington DC per diem allowances.
- San Diego’s rate changes by month and sits above the national standard for most of the year. If your team travels to San Diego regularly, the current monthly GSA rates for San Diego are worth bookmarking.
How do you look up per diem rates for a specific city?
To find the correct per diem for your trip, visit the official GSA page on per diem rates by city and search by city, state, or ZIP code. The results show the maximum lodging rate for each month along with the flat M&IE allowance. Always use the rate applicable to the specific month of travel, as lodging limits for Non-Standard Areas (NSAs) vary throughout the year.
What is the high-low substantiation method?
If city-by-city lookups feel like too much work, the IRS offers a simplified alternative. The high-low method uses just two flat rates for all CONUS travel: one for designated high-cost areas and one for everything else.
For 2025-2026: the high-cost rate is $319/day ($233 lodging + $86 M&IE) and the standard rate is $225/day ($151 lodging + $74 M&IE). High-cost cities include New York, San Francisco, Boston, Chicago, and others listed in the annual IRS notice.
The tradeoff: if you choose the high-low method for a given employee, you must apply it consistently for their entire calendar year of travel. You can’t switch back to city-specific rates mid-year.
When Is Per Diem Required to Be Paid?
Per diem is not legally required under federal law. Employers must reimburse employees for business travel expenses only to the extent that failing to do so would push effective wages below the federal minimum under the Fair Labor Standards Act. Beyond that, per diem is a policy choice, not a legal obligation.
Do companies have to follow the federal per diem rate?
No. Companies can set rates above or below the GSA benchmark. The federal rate only matters for one specific reason: staying at or below it keeps per diem non-taxable. Going above it creates taxable income for the overage. Going below it is legal but tends to generate employee complaints from anyone who knows the federal rate exists, which is increasingly everyone.
How Do You Calculate Per Diem for a Business Trip?
Here’s a worked example. An employee is traveling to Seattle, Washington, for a 5-day trip in May.
Step 1: Look up Seattle on gsa.gov. May lodging rate: $232/night. M&IE rate: $79/day.
Step 2: Apply the first and last day rule to M&IE only: $79 × 0.75 = $59.25.
Step 3: Build the calculation:
| Day | Lodging | M&IE | Day Total |
| Day 1 (arrival) | $232 | $59.25 | $291.25 |
| Day 2 | $232 | $79 | $311.00 |
| Day 3 | $232 | $79 | $311.00 |
| Day 4 | $232 | $79 | $311.00 |
| Day 5 (departure) | $0* | $59.25 | $59.25 |
*No lodging on the final night if the employee returns home
Total reimbursement: $1,283.50
Important: if the employee books a hotel at $195/night instead of the $232 cap, they’re reimbursed $195, not $232. Lodging is the actual cost up to the maximum, not a flat payment, regardless of what you spent.
Per Diem vs. Actual Expense Reimbursement: Which Works Better?
Both approaches have legitimate use cases. The right choice depends on how frequently your employees travel and how variable their costs are.
Per diem works best when your team travels often to predictable cities, and you want simple budgeting, fewer receipts, and lower admin time. Actual expense reimbursement makes more sense for infrequent trips, high-cost events, or when you need precise cost tracking for client billing.
How Does ITILITE Take the Work Out of Per Diem Management?
Managing per diem manually sounds simple until you’re doing it for a team that travels constantly. Looking up GSA rates for every destination, applying first and last day calculations, tracking 60-day expense report deadlines, and reconciling corporate card data, the admin adds up fast, and errors are easy.
ITILITE builds per diem directly into the booking and approval flow. When an employee books a trip, the system pulls the correct GSA rate for that destination and period automatically. First and last day calculations happen without anyone doing the math. Employees see their daily allowance before they travel, not after they’ve submitted a claim and it gets adjusted.
For your finance team, reimbursements come pre-calculated, categorized, and ready to sync with your ERP. No manual math. No chasing late reports. Per diem should make travel simple, not stressful. If your current process feels heavy, it may be time to see how it works when it’s automated.
Book a demo with an ITILITE product expert, and walk away knowing exactly what your per diem management could look like with the right system behind it.
