Per Diem Policy: Rates, Accountable Plans, and Recordkeeping

A per diem policy pays employees a fixed daily allowance for business travel instead of reimbursing every receipt, and it keeps those payments tax-free when the policy meets the IRS accountable plan rules. For travel on or after October 1, 2025, the simplest federal benchmark is the IRS high-low method: $319 per day in designated high-cost cities and $225 per day everywhere else in the continental United States, with $86 and $74 of those amounts treated as the meal portion.

What a Per Diem Allowance Covers

A per diem breaks into two pieces: lodging, and meals and incidental expenses (M&IE). Some employers roll both into one daily figure. Others reimburse the actual hotel bill and pay only the M&IE portion as a flat amount. The split matters because substantiation works differently for each piece, and because the split approach gives the employer tighter control over hotel spending while still simplifying meals.

Incidentals are the small costs of travel itself, mainly tips for baggage handlers and similar service charges. The incidental portion is $5 per day across all domestic M&IE tiers. An employee with no meal expenses on a given day can still claim that $5 under what the IRS calls the incidental-expenses-only method.¹

Choosing a Rate Structure

Federal per diem rates come from three agencies. The General Services Administration sets rates for the continental United States, covering roughly 300 individually priced locations plus a standard rate for everywhere else.² The Department of State sets foreign rates, and the Department of Defense covers non-foreign locations outside the lower 48, including Alaska, Hawaii, and U.S. territories.³ GSA updates its rates each October, and some high-demand areas carry seasonal adjustments inside the fiscal year.

A private employer has two workable options. The first is to follow the GSA locality rates directly and let the daily amount vary by city. The second is the IRS high-low substantiation method, which collapses the whole country into two numbers. Under IRS Notice 2025-54, from October 1, 2025 through September 30, 2026, that means $319 in high-cost locations and $225 elsewhere in the continental U.S. If the company chooses the high-low method for an employee, it must use that method for the same employee’s entire calendar year of travel.

Partial Travel Days

The federal travel regulation pays only 75% of the M&IE rate on the first and last calendar day of a trip, and on any trip lasting more than 12 hours but less than 24.⁴ Private employers aren’t required to prorate, but most do, and a written policy needs to say either way. Silence produces disputes on every departure and return day.

Accountable Plan Requirements

Per diem is tax-free to the employee only if the arrangement is an accountable plan. This is the structural feature that makes the whole system work, and a policy that misses any one of these three elements turns every dollar paid into taxable wages.⁵

Business connection. The expenses must relate to services the employee performs for the employer. A personal side trip added onto a work conference doesn’t qualify.
Substantiation. The employee must document the time, place, and business purpose of the travel within a reasonable period. The IRS safe harbor treats 60 days from when the expense was incurred as reasonable.
Return of excess. Any amount received above what the employee substantiates has to be returned. The safe harbor gives 120 days from a periodic statement to either substantiate more expenses or send the surplus back.

When all three conditions hold, per diem payments stay off the employee’s W-2 entirely and are exempt from income tax withholding, Social Security, and Medicare tax.⁵

When the Rate Exceeds the Federal Amount

Paying above the applicable federal rate doesn’t blow up the whole payment, but it does create a payroll obligation. The portion up to the federal rate stays tax-free. The excess is treated as paid under a nonaccountable plan, added to the employee’s wages, and subject to withholding in the payroll period when the travel expenses are substantiated.⁵

The result is different, and worse, if the plan itself fails the accountable rules. When the policy doesn’t require substantiation, or lets employees keep unspent funds without returning them, the entire amount becomes wages on Form W-2, subject to federal income tax withholding, Social Security, and Medicare.⁶ Employer and employee both pay employment taxes on payments that could have been tax-free with better paperwork.

Records Employees Still Have to Keep

Per diem cuts paperwork; it doesn’t eliminate it. Under IRS Revenue Procedure 2019-48, an employee using per diem still has to substantiate three elements of each trip: the dates, the locations, and the business purpose.⁷

Individual meal receipts aren’t required when per diem covers M&IE; that flat allowance is the point of the system. Lodging receipts are a subtler question. When the employer pays a combined lodging-and-meals per diem, the federal method doesn’t technically require lodging receipts to substantiate the deemed amount.⁷ In practice most employers still require them, and the IRS rule sets the floor rather than the ceiling.

The One-Year Limit on Temporary Assignments

Per diem only works for temporary travel, and the IRS defines temporary strictly. If a work assignment is realistically expected to last more than one year when it begins, it counts as indefinite, and travel expenses for that assignment aren’t deductible.⁸ Every per diem dollar the employer pays becomes taxable wages from day one.

The test looks at realistic expectations at the start, not how long the assignment actually runs. An assignment originally expected to wrap in ten months stays temporary. If you later learn it will run past one year, tax-free treatment stops that day, and every dollar after is income.⁹ The IRS may also aggregate a sequence of short projects at the same city into a single indefinite assignment when the combined stretch exceeds a year and long-term work at that location was reasonably foreseeable. Workers with no fixed tax home at all can’t claim travel expenses regardless of assignment length, because they’re never “away from home” in the tax sense.

Self-Employed Users of Per Diem

Freelancers and sole proprietors can use the federal per diem method, but with a real limit: they may use the standard allowance only for meals and incidentals. Lodging has to be deducted at actual cost with receipts.¹ The meal deduction is capped at 50% of the allowable amount, so a $74 M&IE rate yields a $37 deduction.¹⁰ Sole proprietors report the deduction on Schedule C.⁹ Travel must take the taxpayer away from the tax home long enough to require sleep or rest; a day trip doesn’t qualify.

Employers also face the 50% cap on the meal portion of per diem when they deduct it as a business expense.¹⁰ The lodging portion is fully deductible.

Putting the Written Policy Together

Most compliance problems with per diem don’t come from employees pushing the limits. They come from vague policies that never nail down the accountable plan pieces. A written policy should state, at minimum:

Which federal rate the company follows — GSA locality rates or the IRS high-low method — and how the company will keep current with annual updates. Linking directly to the GSA rate tables lets the policy stay accurate without a yearly rewrite.
Whether the company pays a combined lodging-plus-M&IE per diem or reimburses actual lodging while paying only M&IE as a flat amount.
How partial travel days are handled, whether by the federal 75% rule or another method.
What the employee must document: dates, locations, business purpose, and any employer-required receipts.
The deadlines for substantiation and return of excess funds. The 60-day and 120-day safe harbors are a defensible starting point.
Any cap the company sets above the federal rate, with a note that the excess will be added to wages and taxed.

Whether the policy uses the combined or split structure, the accountable plan rules apply the same way. Business connection, substantiation, and return of excess are the conditions that keep the payments tax-free, and none of them can be dropped.⁵

1
Internal Revenue Service. Publication 463 – Travel, Gift, and Car Expenses
2
GSA. Per Diem Rates
3
General Services Administration. Frequently Asked Questions, Per Diem
4
eCFR. 41 CFR Part 301-11 – Subsistence Expenses
5
eCFR. 26 CFR 1.62-2 – Reimbursements and Other Expense Allowance Arrangements
6
Internal Revenue Service. Fringe Benefit Guide
7
Internal Revenue Service. Internal Revenue Bulletin 2019-51
8
Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
9
Internal Revenue Service. Business Travel Expenses
10
Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses