How Does Per Diem Pay Work: Rates, Tax Rules, and Exceptions

Per diem pay is a flat daily allowance an employer gives an employee for business travel expenses, so nobody has to itemize every meal receipt or hotel bill. For fiscal year 2026, the standard federal rate across most of the continental United States is $178 per day: $110 for lodging and $68 for meals and incidental expenses. When the payment stays at or below the federal rate and the employee files the required expense report, it is tax-free. Miss those conditions and the whole amount becomes taxable wages.

What Per Diem Covers

Per diem has two parts: lodging, and meals and incidental expenses (M&IE). The lodging portion pays for the hotel room. Lodging taxes are not built into the rate but can be reimbursed separately as a miscellaneous travel expense.

The M&IE portion covers all meals, room service, laundry and dry cleaning, and tips for people like food servers and luggage handlers.¹ Meal taxes and meal tips are already inside the M&IE rate, so they aren’t reimbursed on top of it.²

Transportation is not included. Airfare, rental cars, parking, and similar costs go through a separate reimbursement. Personal expenses and entertainment fall outside the allowance entirely.

One rule surprises new travelers: unused lodging per diem cannot be moved over to cover meals, and unused M&IE cannot be applied to lodging.² A cheap hotel doesn’t buy you a better dinner on the company’s tab.

Federal Per Diem Rates for 2026

The General Services Administration sets the maximum daily rates for travel within the continental United States, known as CONUS.³ For fiscal year 2026, which runs October 1, 2025 through September 30, 2026, the standard rate stays at $110 for lodging and $68 for M&IE, unchanged from the prior year.⁴

About 300 locations carry higher, non-standard rates that reflect local costs, with M&IE tiers running from $68 to $92.⁴ If your destination isn’t in the GSA’s location tables, the standard rate applies.³

For international travel, the Department of State sets the rates based on the cost of living in foreign cities and territories.⁵ New CONUS rates are typically announced in mid-August and take effect October 1 with the new federal fiscal year.³

Partial Travel Days

The first and last days of a trip don’t pay the full M&IE amount. Federal employees receive 75% of the destination’s M&IE rate on both the departure and return days.² Most private employers follow the same convention. At the standard $68 M&IE rate, that comes to $51 on a travel day.

One-day trips lasting more than 12 hours but not requiring an overnight stay also pay 75% of M&IE.² Lodging is simpler: you get it for each night you actually need a room.

When Per Diem Is Tax-Free

Per diem escapes income tax only when the employer’s reimbursement setup qualifies as an accountable plan. Miss any single requirement and the whole payment turns into taxable wages.

Three conditions have to be met:

Business connection. The travel must serve a legitimate business purpose.
Substantiation. The employee has to file an expense report showing the date, location, and business purpose of the trip within 60 days of when the expense was paid or incurred.⁶
Return of excess. Any per diem paid beyond what the employee substantiated has to be returned to the employer within 120 days.⁷

When per diem stays at or below the federal rate and the employee meets those reporting requirements, the payment is excluded from gross income and doesn’t show up as wages on the W-2. Any portion paid above the federal rate is taxable wages, and the employer has to withhold Social Security and Medicare on the excess.¹

If the arrangement doesn’t meet accountable plan standards, say the employer hands out a flat sum without asking for any expense report, the entire per diem becomes taxable wages, not just the excess.¹ Calling something “per diem” doesn’t make it tax-free. The paperwork behind it does.

The One-Year Rule

Even a properly structured accountable plan can’t keep per diem tax-free forever. When a travel assignment is expected to last more than one year, the IRS treats it as indefinite, and the travel location becomes the employee’s new tax home.⁶ Every per diem dollar received during that assignment counts as taxable income.

The clock runs on what’s realistically expected at the start, not on what happens later. An assignment expected to last 18 months but that ends after 10 is still indefinite from day one, and the per diem paid during those 10 months is fully taxable.⁶ A string of short assignments to the same location that together exceed a year can also be treated as indefinite.

The High-Low Shortcut

Looking up the GSA rate for every city an employee visits gets tedious. The IRS offers a simpler alternative called the high-low substantiation method, which sorts all CONUS destinations into two buckets.

For travel from October 2025 through September 2026, the rate is $319 per day in high-cost localities and $225 elsewhere. Meals account for $86 of the high rate and $74 of the low rate.⁸ That meal split matters on the employer’s return, because federal law limits the business deduction for meals to 50%.⁹

High-cost cities for this period include New York City, San Francisco, Los Angeles, Chicago, Boston, and Washington, D.C.⁸ The IRS publishes the full list each year, and some cities only qualify during certain months based on seasonal pricing. Once an employer uses the high-low method for a given employee, it can’t switch back to the regular GSA tables for that same employee during the calendar year.

What Private Employers Can Pay

Private companies aren’t tied to the GSA rate tables. An employer can pay more or less than the federal per diem.¹ The GSA rate is just the ceiling for tax-free treatment; anything above it is taxable to the employee. Nothing in federal law forces employers to pay the full GSA amount, and plenty of companies set internal rates below it.

Some states require employers to reimburse necessary business expenses, which can shape per diem policies. The rules vary by state. If your company’s per diem doesn’t cover actual costs in an expensive city, it’s worth checking your state’s labor rules.

When the Trip Doesn’t Qualify

Not every business trip is eligible. The IRS requires travel to be long enough that the employee needs to stop for substantial sleep or rest to do the job.¹⁰ A same-day round trip, two hours out and two hours back with a meeting in the middle, doesn’t qualify no matter how draining it is.

The trip also has to take you away from your tax home, which the IRS defines as the general area where your primary place of work is located, not where you live.¹⁰ Living in the suburbs and commuting downtown makes downtown your tax home. A short hop from your office to a client site across town doesn’t count.

Self-Employed and Contractor Rules

Self-employed workers don’t get per diem from an employer, but they can use the federal M&IE rate as a standard meal allowance when calculating travel deductions. Only meals qualify. There is no per diem shortcut for self-employed lodging, which has to be deducted at actual cost with receipts.¹¹

Independent contractors sometimes receive per diem through their client contracts. The same accountable plan rules apply: substantiate the travel, and anything above the federal rate is taxable. The 50% meal deduction limit still applies on the contractor’s own return.⁹

Transportation Industry Rules

Truckers, pilots, bus drivers, railroad crew, and merchant mariners pass through multiple per diem localities on a single trip, which makes rate lookups impractical. The IRS gives them a special standard meal allowance. For 2025, the rate is $80 per day inside the continental United States and $86 outside CONUS.⁶ Once you pick the special rate, you use it for every trip that tax year. No switching back and forth with regular location-based rates.

Transportation workers also get a better meal deduction. Most taxpayers can deduct 50% of meal expenses, but individuals subject to Department of Transportation hours-of-service rules can deduct 80%.⁹ The higher percentage applies to anyone whose work directly involves moving people or goods by plane, truck, bus, train, or ship and who regularly travels away from home.⁶

1
Internal Revenue Service. Per Diem Payments Frequently Asked Questions
2
U.S. General Services Administration. Frequently Asked Questions, Per Diem
3
U.S. General Services Administration. Per Diem Rates
4
Federal Register. Maximum Per Diem Reimbursement Rates for the Continental United States (CONUS)
5
U.S. Department of State. Office of Allowances
6
Internal Revenue Service. Publication 463, Travel, Gift, and Car Expenses
7
eCFR. 26 CFR 1.62-2 – Reimbursements and Other Expense Allowance Arrangements
8
Internal Revenue Service. Notice 2025-54, Special Per Diem Rates
9
Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses
10
Internal Revenue Service. Income and Expenses 2
11
Internal Revenue Service. Per Diem Rates Frequently Asked Questions