Companies often use a per diem by zip code payment to employees traveling for business, particularly for extended periods of time to cover lodging, meals and incidentals. The U.S. General Services Administration recommends and the IRS recognizes a per diem by zip code, and the amount is usually not reported as taxable income. However, in some cases a portion of the amount may be taxable. It's vital to save receipts from all business expenditures to avoid incurring additional tax liability. A tax deduction is now only allowed if it's a self-employed per diem.
Per Diem By Zip Code
The GSA uses two methods for calculating per diem, the high-low method and a standard rate. High-low offers only two rates, one for higher-priced locations and a second for lower-priced locations. The standard method offers different rates for each location, and while more accurate, it requires more record-keeping. A company taking per diem tax deductions for working out of town must use one method for all employees for a given year and may not change methods or differentiate among employees.
Travel days are paid at three-quarters of the full day's rate, regardless of the time or length of travel. If actual expenses exceed the allowed per diem, the employee is no longer allowed to take per diem tax deductions for working out of town as unreimbursed expenses. That went away with the Tax Cuts and Jobs Act.
The IRS treats a per diem payment as a reimbursement for business expenses. As such, the amount is not taxable income, as long as the per diem does not exceed the actual expenses incurred. Employees are expected by IRS rules to keep track of itemized expenses and return any excess per diem payment to the employer, otherwise the excess is reported as wages on the W-2, and taxed as income. If the per diem is more than the federal rate, the employer is required to verify both the nature and amount of the expense, or report the excess amount as income. At the minimum, the IRS requires records to show the time, place, and business purpose of travel. For those working as independent contractor, separate self-employed per diem rules apply.
Exceptions for Self-Employed Individuals
Self-employed individuals can only use a self-employed per diem for meals and not for combined lodging and meals. The cost of lodging and incidentals can be fully deducted on Schedule C, E or F, depending on the type of business. Amounts in excess of the actual expenses must be repaid. Employees of a sole proprietorship are subject to regular employee per diem rules and reporting on lodging, meals and incidentals.
2018 Taxes and Unreimbursed Expenses
At one time, if an employee's expenses exceeded the per diem tax deductions for working out of town, he could claim it as an unreimbursed employee expense. The TCJA eliminated that expense, trading it out for the much-higher $12,000 standard deduction that applies from the 2018 tax year forward.
2017 Taxes and Unreimbursed Expenses
If you're still filing your 2017 taxes, however, there's good news. If the per diem amount is not sufficient to cover your business expenses, you may take a deduction for unreimbursed expenses on your return. You'll do this using Form 2016, Employee Business Expenses.
- Internal Revenue Service Publication 535: Business Expenses
- Internal Revenue Service: Frequently Asked Questions about Per Diem
- IRS: Publication 529 (2017), Miscellaneous Deductions
- CNBC: New tax law takes a hatchet to these worker expense deductions
- IRS: Instructions for Form 2106
- NerdWallet: The 2018 Standard Deduction: How Much It Is and When to Take It
- GSA: Frequently Asked Questions, Per Diem
- business trip image by Alexey Klementiev from Fotolia.com