Many companies use per diem stipends to cover employee travel costs. It’s a useful way to simplify expense reimbursement, but unless certain IRS rules are followed, what was meant to be a tax-free benefit can turn into taxable wages. Here’s what you and your organization should know.
What Makes Per Diem Non-Taxable
To keep per diem payments from being taxable, these core criteria need to be met:
- Accountable Plan
The plan must require that the employee:
- Submits documentation of dates, places of travel, and the business purpose;
- Returns any excess amounts paid over what was substantiated;
- Operates under a reasonable timeframe for submitting the expense report.
- “Away-from-Home” or Overnight Travel
The travel must generally involve sleeping or resting away from the employee’s home or regular place of work. Without an overnight component, the IRS typically considers day-travel per diems as taxable income.
- Limits on Amounts
Per diem amounts should not exceed IRS or federal government approved rates for lodging, meals & incidental expenses for the applicable geographic area. Any portion above those rates may become taxable, unless carefully handled.
- Tax Home and Duration
If an employee travels repeatedly to the same location for more than one year, that location may become their “tax home.” Once that happens, per diem beyond that point often loses its non-taxable status because the travel is no longer considered temporary.
Common Pitfalls and Risks
- Paying a flat daily stipend not tied to actual travel or expense substantiation
- Failing to collect or document travel dates, location, business purpose
- Not making employees return excess per diem amounts when reimbursements exceed substantiated costs
- Letting “temporary” travel become so long or repetitive that it establishes a permanent work location
IRS guidance (in Publication 463 and the Per Diem FAQs) warns that abusing these rules can cause all future stipends to be treated as taxable wages, even retrospectively.
What Employers and Employees Should Do
- Review your travel policies to ensure they satisfy an accountable plan structure
- Make sure per diem rates used match the federal/local rates for lodging, meals, etc.
- Have your employees submit timely, detailed expense reports
- Monitor how often and how long employees are traveling to the same locations to avoid unintentionally setting a new tax home
If you’re an existing SST client and have questions about how IRS regulations affect your per diem policy, or want help ensuring your company’s practices are compliant, please reach out and we’ll be glad to review together.