Building Your Business Business Taxes What Are Per Diem Rates? Definition and Examples of Per Diem Rates By Jean Murray Updated on September 13, 2022 Fact checked by Taylor Tompkins In This Article View All In This Article What Are Per Diem Rates? How Do Per Diem Rates Work? How Per Diem Rates Are Set Finding Per Diem Rates Alternatives to Per Diem Rates Tax Deductions on Per Diem Rates Frequently Asked Questions (FAQs) Photo: Maskot / Getty Images A business can reimburse its employees for travel-related expenses without creating taxable income by paying them the appropriate per diem rate. These rates differ according to how expensive the travel destination is, and most of the ones for travel within the U.S. are set by the General Services Administration (GSA). Key Takeaways Your business can reimburse your employees for lodging, meal, and incidental expenses incurred while traveling by paying them the appropriate per diem rate.These rates differ according to how expensive the travel destination is and sometimes the time of year.They are used by the Internal Revenue Service to determine whether non-federal-government employees owe taxes on reimbursements for work-related travel expenses.Rates for the continental U.S. are set by the General Services Administration. Those for Alaska, Hawaii, and U.S. territories and possessions are set by the Department of Defense. And those for other countries are set by the Department of State. Learn more about these rates, including when they can be used and when they can't. What Are Per Diem Rates? The term per diem—from the Latin for "by day"—refers to a daily allowance for specific travel expenses for employees. There are per diem rates for two separate components: Lodging Meals and incidentals These rates are set by federal agencies and apply to federal government employees who are traveling for work. They are also used by the Internal Revenue Service for the purpose of determining whether non-federal-government employees owe taxes on reimbursements for work-related travel expenses. Starting with 2019 tax returns, incidental expenses (IE) consist only of fees and tips given to porters, baggage carriers, and hotel and ship staff members. Expenses for traveling between lodging, business, and dining locations and for mailing travel vouchers and credit card bills are no longer included in IE. These transportation and mailing expenses should be reimbursed separately, as should those for laundry and cleaning services. Note Employee driving expenses are also handled separately from per diem expenses. To account for driving expenses, you may be able to use actual expenses or the standard IRS mileage rate, which was 62.5 cents per mile a mile for the second half of 2022. How Do Per Diem Rates Work? Your business must have an accountable plan for employee reimbursement expenses in order for the reimbursements to not be treated—and taxed—as pay. To be considered an accountable plan, the expenses must have a business connection, the employee must report them in a reasonable amount of time and any excess reimbursement must be returned in a reasonable amount of time. Note The IRS considers what a "reasonable amount of time" is based on the circumstances of individual situations. For more guidance, see Publication 463. Per Diem Use Criteria The IRS considers your company's use of the per diem allowance to be proof of employees' expenses if four criteria are met: You limit payments of their expenses to those that are ordinary and necessary in the conduct of the trade or business.The allowance is similar in form to and not more than the federal rate.They prove the time, place, and business purpose of their expenses to you within a reasonable period of time.They aren’t related to you. If they are related to you and/or fail to meet any of the other criteria, they must be able to prove their per diem expenses to the IRS. How Per Diem Rates Are Set The General Services Administration sets the per diem rate for each city and state within the continental (also known as contiguous) United States (CONUS). Per diem rates are larger in higher-cost areas, and in some cases, they also vary according to the time of year. Costs for hotels, meals, and other typical travel expenses can vary widely from one city to another and from winter to summer. The Department of Defense (DOD) sets the per diem rates for Alaska, Hawaii, and U.S. territories and possessions, which is called OCONUS (outside the contiguous United States) for short. The Department of State (DOS) sets per diem rates for other countries. The per diem rates get updated every year, usually on October 1, with the beginning of the U.S. government's fiscal year. Note If your employee is traveling to two cities on the same day, they should use the rate for the location where they are sleeping. Finding Per Diem Rates Employees can search for per diem rates for locations where they are traveling on the GSA's Per Diem Rates, the DOD's Per Diem Rates Query, and the DOS's Foreign Per Diem Rates by Location websites. Alternatives to Per Diem Rates You can choose to reimburse your workers for their actual travel expenses or a flat rate for each trip, but the employees will be expected to pay tax on the amount that exceeds the per diem rate and you will have to pay employment taxes as well. Instead of using the actual per diem rates for each location, your company's employees may utilize a high-low method that consists of one rate for all high-cost destinations and a lower rate for all other destinations. As of Oct. 1, 2021, the rate for high-cost locations is $296, including $74 for M&IE. For all other locations, it's $202, including $64 for M&IE. Note Some locations are considered to be high-cost only during certain times of the year. For example, seaside destinations in northern states are high-cost during the summer months but low-cost the rest of the year. Tax Deductions on Per Diem Rates Your business may deduct 100% of the amount reimbursed to an employee for lodging expenses but only 50% of the amount reimbursed for meal expenses. Your employees may deduct 50% of the unreimbursed cost of meals above the per diem rate. There is no deduction for costs for which they were reimbursed. Frequently Asked Questions (FAQs) What does M&IE mean? The M&IE is the cost of meals and incidental expenses. It is one component of the per diem allowance for specific travel expenses for employees. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. GSA. "Per Diem Rates." Internal Revenue Service. "Publication 463: Travel, Gift, and Car Expenses." Internal Revenue Service. "IRS Increases Mileage Rate for Remainder of 2022." Internal Revenue Service. "Notice 2020-71, 2020-2021 Special Per Diem Rates." Internal Revenue Service. "Publication 535, Business Expenses."