A per diem is a set amount of money employers provide employees for travel-related expenses. It’s often given to cover daily costs like meals, lodging, and transportation. Per diems are typically tax-free, meaning you don’t have to pay taxes on the money. However, if you spend less than the per diem amount, the unused portion becomes taxable income. And if you exceed the per diem amount, the excess is taxable. It’s important to keep track of your expenses and per diem payments to ensure proper tax compliance.
Per Diem Definition and Purpose
Per diem is a daily allowance given to employees to cover their expenses while traveling for business. It’s designed to reimburse employees for reasonable costs associated with travel, such as meals, lodging, transportation, and other incidental expenses.
Per diem rates are typically established by employers based on the cost of living in the destination city or region. The rates may vary depending on factors such as:
- Location of travel
- Duration of travel
- Employee’s job title or level
Per diem payments are non-taxable if they meet the following requirements:
- The per diem rate is reasonable and does not exceed the actual cost of expenses.
- The employee is away from their tax home overnight.
- The employee adequately accounts for the expenses (e.g., receipts or credit card statements).
However, if the per diem rate exceeds the actual expenses, the excess amount is considered taxable income. In such cases, the employee must report the excess amount on their tax return.
| Destination City | Per Diem Rate |
|---|---|
| New York City | $220 |
| San Francisco | $200 |
| Chicago | $175 |
If you receive a per diem from your employer to cover expenses while traveling for business, you may be wondering if it is taxable. The answer is yes, per diems are generally taxable income unless a statutory exception applies.
The amount of the per diem that is taxable depends on several factors, including the location of the travel, the purpose of the travel, and the amount of the per diem. The Internal Revenue Service (IRS) has established rules for determining the taxable portion of a per diem.
Federal Tax Treatment of Per Diems
- Statutory Exception: Per diems are not taxable if they are paid to employees who are traveling away from home for more than one year and the travel expenses exceed the per diem amount.
- Taxable Portion: If the statutory exception does not apply, the taxable portion of a per diem is equal to the amount of the per diem that exceeds the federal per diem rate for the location of the travel.
The federal per diem rates are published by the General Services Administration (GSA) and are updated annually. You can find the current per diem rates on the GSA website.
For example, if you travel to San Francisco for business and your employer pays you a per diem of $150 per day, the taxable portion of the per diem would be $75 per day. This is because the federal per diem rate for San Francisco is $75 per day.
You will need to report the taxable portion of your per diems on your federal income tax return. You can do this by using Form 2106, Employee Business Expenses.
| Location | Federal Per Diem Rate |
|---|---|
| San Francisco, CA | $75 |
| New York, NY | $100 |
| Chicago, IL | $85 |
State and Local Tax Implications
The taxability of per diems varies from state to state and locality to locality. In some jurisdictions, per diems are considered taxable income, while in others, they are exempt.
The following is a general overview of the state and local tax implications of per diems:
- **Federal Income Tax:** Per diems are generally not taxable for federal income tax purposes if they are used to cover reasonable expenses while traveling away from home for business.
- **State Income Tax:** The taxability of per diems for state income tax purposes varies from state to state. Some states, such as California and New York, do not tax per diems, while other states, such as Illinois and Pennsylvania, do.
- **Local Income Tax:** The taxability of per diems for local income tax purposes also varies from locality to locality. Some localities, such as New York City and Philadelphia, do not tax per diems, while other localities, such as Chicago and Los Angeles, do.
It is important to note that the taxability of per diems can also depend on the specific facts and circumstances of each case. For example, the taxability of per diems may vary depending on whether the per diem is paid to an employee or a contractor, and whether the per diem is used to cover expenses incurred while traveling for business or for personal reasons.
If you are unsure whether your per diems are taxable, it is important to consult with a tax professional.
| State | Taxability of Per Diems |
|---|---|
| California | Not taxable |
| New York | Not taxable |
| Illinois | Taxable |
| Pennsylvania | Taxable |
Recordkeeping and Compliance
Accurate recordkeeping is crucial for proper tax treatment of per diems. Employers and employees should maintain detailed records to support their claims and avoid potential tax liabilities.
The following records should be kept:
- Start and end dates of travel: Shows the period of time for which the per diem is being claimed.
- Destinations: List the cities or towns where the travel occurred.
- Purpose of travel: Indicates the business nature of the trip.
- Amount of per diem: Shows the daily rate claimed.
- Total per diem received: Sum of all per diems claimed for the trip.
- Expenses incurred: Detailed receipts for any expenses incurred, such as meals, lodging, and transportation.
Compliance with IRS regulations is essential. Employers must ensure that per diem rates and policies comply with the applicable guidelines. Employees must use per diems only for eligible expenses and keep accurate records to substantiate their claims.
| Record | Employee Responsibility | Employer Responsibility |
|---|---|---|
| Travel Itinerary | Maintain records of travel dates and destinations | None |
| Per Diem Rate | Confirm that the rate complies with IRS rules | Establish and communicate the per diem rate policy |
| Actual Expenses | Retain receipts for eligible expenses | None |
| Compliance | Both parties must comply with IRS regulations | Both parties must comply with IRS regulations |
Well, there you have it, folks! The nitty-gritty on per diems and taxes. Remember, it’s always a good idea to double-check with a tax professional if you’re uncertain about the specific rules in your situation. And while you’re here, be sure to browse our other articles for more money-saving tips and financial advice. Hey, knowledge is power, right? Thanks for stopping by and keep your money where it belongs—in your pocket! We’ll be here with more financial insights whenever you need ’em.