What Is Per Diem, and How Is It Taxed?

Businesses gives (or reimburses) per diem payments to employees for business-related travel expenses. These may cover meals and incidentals, lodging, or possibly both. Your employer provides these as reimbursement for such expenses, and the payments usually are not taxable. However, the rate that determines your tax status varies depending on several factors. We take a closer look below. 

A financial advisor can help guide you through the tax planning process.

What Is Per Diem?

Per diem is the allowance, or reimbursement, given to employees for business travel and lodging, meals or incidental expenses. For self-employed individuals, per diem only applies to meals. As for the U.S., per diem rates only apply within the lower 48 Continental United States (CONUS), according to the General Services Administration (GSA). The State Department sets the foreign per diem rates (for countries such as China, France, Germany, etc), while the Department of Defense (DOD) controls the non-foreign rates in Alaska, Hawaii and all other U.S. Territories.

Your per diem payments won’t be included in your wages if they meet the following qualifications:

1. The payments are equal to or less than the federal per diem rate, and
2. You give your employer an expense report. The IRS states that expense reports must include the business purpose of the trip, the date and place of the trip and receipts for lodging.

Today, many businesses choose to provide payment cards for valid business expenses that meet specific requirements.

Is Per Diem Taxed?

Per diem payments aren’t subject to income tax because the IRS doesn’t consider them part of an employee’s wages. However, your payments will be taxable if the following apply to you:

• You didn’t file an expense report with your employer.
• Your expense report filed doesn’t include the date, time, place, amount and business purpose of the expense.
• Your employer gives you a flat amount without requiring an expense report.
• Your per diem payments exceed that of the standard federal rate.

It’s important to understand your employer’s per diem policy before accepting the payments to avoid additional tax liability.

Per Diem Rates By Location

Just as the cost of living varies for different areas, so do per diem rates. Each city, town and state has fluctuating economic costs for things like housing, healthcare and taxes. For August 2026, the GSA set a standard rate of $110. However, New York City has its own rate of $237. ¹ As you can imagine, location directly affects how much you’ll receive in per diem payments without triggering the tax.

There are generally two ways to confirm the per diem rate for your area. You can check with your employer, or you can use the GSA’s per diem rate finder. The tool allows you to search by city, state or zip code. It allows you to verify what your employer may give you if you want to double-check if you’ll owe any potential taxes.

Can Employers Deduct Per Diem Payments? 

If you’re a business owner paying per diem or looking to make an argument to start receiving these types of payments at your business, then you’re in luck. Employers can deduct up to 50% of per diem payments for meals or incidentals. Plus, the business can deduct the entire lodging expense as long as it collects expense reports.

Again, if you’re a self-employed business then it becomes more difficult to get credit for per diem payments to yourself. You can’t use lodging rates and must instead submit the exact expense and keep it in a separate report. The same 50% of meal costs can be deducted, however.

What It Costs When You Don’t File an Expense Report

Missing documentation requirements can turn tax-free per diem into taxable income. If you received $2,000 in per diem but failed to submit an expense report, the entire amount becomes wages subject to federal income tax. Here’s what that costs at different income levels:

The cost varies with your marginal tax bracket. A $2,000 undocumented per diem costs $440 to $640 in federal tax alone, depending on your income. Add state and local income taxes, which can range from 3% to 13%, and the total cost climbs to $500–$900 on that same $2,000. Filing an expense report with proper documentation eliminates this cost entirely.

Self-Employed: Per Diem vs. Itemizing Actual Expenses

Self-employed workers face a different calculation. You can’t deduct lodging through per diem, and meals are limited to 50% of the per diem rate. For FY 2026, the standard per diem is $178 per day: $110 for lodging and $68 for meals and incidental expenses (M&IE). Whether per diem makes sense depends on what you actually spend versus what the rate allows. ²

Example 1: Your Meal Expenses Are Lower Than Per Diem Allows

The FY 2026 M&IE rate is $68. You can deduct 50% of that, or $34 per day. If you only spent $20 per day on meals, per diem nets you a $14/day deduction benefit ($34 allowed minus $20 actual). Over a 20-day business trip, that’s $280 in extra deductions you wouldn’t get by itemizing actual expenses.

Example 2: Your Meal Expenses Exceed the Per Diem Allowance

You spent $50 per day on meals during a business trip. The per diem allows $34/day deductible (50% of $68). Itemizing actual expenses gives you a $25/day deduction ($50 × 50%), which falls short of per diem.

In this case, per diem wins because the FY 2026 rate is generous enough to cover your actual spending after the 50% limitation. However, itemizing is simpler when your actual expenses fall below the rate. Keep receipts and track mileage, lodging, and meal costs. If your actual expenses consistently exceed per diem rates, itemizing may yield larger deductions over time. A tax professional can help you determine which method saves more based on your typical business travel patterns.

Bottom Line

You may be eligible to receive per diem payments when you travel for business. These payments can cover expenses such as lodging, meals and incidental expenses. Employees may receive reimbursement for all three types of expenses, while self-employed individuals generally can use per diem rates for meals and incidental expenses. Per diem payments are typically not taxable when you meet the requirements, but failing to properly document your expenses can turn otherwise tax-free payments into taxable income. Rates also vary by location, so the amount you can receive may depend on where you travel.

“Per diem is typically non-taxable so long as you’re organized and follow the proper procedures. Like anything, poor records and inaccurate accounting can turn this non-taxable perk into taxable income,” said Matthew Hofacre, MSPFP, CFP®, EA.

Matthew Hofacre, MSPFP, CFP®, EA provided the quote used in this article. Please note that Matthew is not a participant in SmartAsset AMP, is not an employee of SmartAsset and has been compensated. The opinion voiced in the quote is for general information only and is not intended to provide specific advice or recommendations.

Tax Planning Tips for Beginners

• Financial advisors can provide professional guidance on tax planning and much more. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you work under an employer, you’ll probably be subject to income tax. If you’re self-employed, you’ll have to pay both income taxes and self-employment (SE) taxes. As you plan out your budget, it’s best to not be caught off guard when tax season comes. Our income tax calculator can give you an estimate of how much you’ll pay.

Photo credit: ©iStock.com/cnythzl, ©iStock.com/Dacharlie, ©iStock.com/Panya_sealim