Per diems are an allowance granted to employees by their employers to cover the expenses they incur while on business trips. For an allowance to be granted, the nature of the employee’s expenses must be professional. This covers the following expenses:
- Lodging expenses: the costs for a hotel or a temporary residence. An allowance will only be granted if the employee incurs these costs, so staying at a friend’s house for example would not be valid;
- Meal expenses: the costs for breakfast, lunch, and dinner;
- Incidental expenses: money granted to an employee for additional expenses they may incur (such as laundry or tips). Incidental expenses are usually combined with meal expenses.
In principle, this daily allowance is tax-free. However, in the case where the allowance exceeds the federal per diem rate, the excess will be considered taxable income. The employer can also choose to pay less than the federal per diem rate. In such a case, the daily allowance will be tax-free.
For the daily allowance to be tax-free, employees must file an expense report within a reasonable period (60 days). This expense report needs to include the following information:
- The business purpose of the trip;
- The date & location of the business trip;
- Receipts for accommodation.
It is important to note that transportation costs and mileage allowances are not covered by per diems.
The per diem rates differ based on whether it is a domestic business trip or a business trip abroad.
Domestic business trips
The maximum daily allowance rates for domestic trips are defined per state. The U.S. General Services Administration (GSA) publishes the rates and they can be found on GSA’s website.
You can also find the complete breakdown of the lodging, meal and incidental expenses on the website. Depending on the location, the domestic daily rates will fall under one of these amounts:
|M&IE Total||ContinentalBreakfast/Breakfast||Lunch||Dinner||Incidental expenses||First & Last Day of Travel (always calculated at 75%)|
The separate amounts for breakfast, lunch and dinner are listed, in case you need to deduct any of those meals.
Example: You receive an M&IE total allowance of $59. Free breakfast is supplied by the hotel which means $13 needs to be deducted from the per diem allowance. The total allowance in this case will thus be $46.
Business trips abroad
For the maximum amount of daily allowance for business trips abroad, the daily allowances set by the US Department of State are used. These are rates used for travel of federal employees, but are also used by private employees. The rates can be found on their website.
Again there is a complete breakdown of the lodging, meal and incidental expenses on GSA’s website. The separate amounts for breakfast, lunch and dinner are listed, in case you need to deduct any of those meals.
Bert goes on a business trip of 3 days to Ottowa (1-2 March 2023). For all 3 days, the breakfast was included in the hotel. The daily rate is $110 (see M&IE rate column). The M&IE breakdown is: $17 breakfast – $27 lunch – $44 dinner – $22 incidentals.
For the entire business trip, Bart’s per diems will be: ($110 -$17) + ($110 -$17) + ($110 -$17)= $279.