Per Diem Explained: How Business Travel Allowances Work

A per diem rate has two parts. The lodging rate is a ceiling for the nightly room cost, excluding taxes. The meals and incidental expenses (M&IE) rate is a flat daily amount for breakfast, lunch, dinner and incidentals, which in the federal system means fees and tips to porters, baggage carriers and hotel staff.

Flights, rental cars, rideshares, parking and conference fees sit outside per diem and are reimbursed as actual expenses. Under the federal rules, U.S. lodging taxes are also reimbursed separately, on top of the lodging rate.

For U.S. government travelers, three agencies set rates. The General Services Administration (GSA) publishes rates for the continental United States each federal fiscal year, which starts October 1, with specific rates for many cities and counties and a standard rate everywhere else. The State Department’s Office of Allowances sets foreign rates and updates them monthly. The Defense Department’s travel office covers Alaska, Hawaii and U.S. territories.

Rates vary widely: a major city in peak season can carry a lodging rate several times the standard rate. Look up current figures on the GSA per diem site and the State Department’s foreign per diem tables rather than relying on last year’s numbers.

Generally not, if your employer pays it under an accountable plan: the expenses are business-related, you substantiate the time, place and business purpose of the trip, and you return any excess. Per diem at or below the federal rate is treated as substantiated for the amount, so you don’t need meal receipts. Amounts above the federal rate that you keep are taxable wages.

The IRS also publishes a simplified high-low rate method for employers each year. For deductions, business meals are generally only 50% deductible, and self-employed travelers can use the federal M&IE rate for meals but not for lodging. See IRS Publication 463 and talk to your tax advisor.

Under federal rules, travelers receive 75% of the M&IE rate on the first and last day of travel, recognizing they won’t eat every meal on the road those days. Lodging is paid for each night away. Many companies copy this convention because it’s simple and defensible.

When a meal is provided, such as a conference lunch or a dinner the company has already paid for, the federal M&IE is reduced by that meal’s value from the GSA meal breakdown. Complimentary hotel breakfasts included in the room rate generally don’t reduce it under federal rules.

Each approach has trade-offs, and many companies blend them. Our travel expense and reporting service can help you model the options, and your travel policy should state the choice clearly.