What Is Per Diem?

Per diem is a daily allowance used to cover business travel expenses such as lodging, meals, and incidental costs, rather than reimbursing each expense individually. This simplifies paperwork and allows your business to support deductions properly. When the allowance stays within federal limits and documentation rules are followed, per diem can be excluded from wages under IRS rules.

IRS Rules: Accountable Plans and Substantiation

To keep per diem payments tax-free, they must be part of an accountable plan. That means:

• The travel must have a bona fide business purpose.
• The traveler must document the time, place, and business purpose of the trip. Receipts are required if lodging is not covered by per diem.
• Any excess amount beyond federal per diem must be returned.

If these criteria are met and the payment does not exceed federal rates, the reimbursement is not included on Form W-2. If they are not met, the amount is taxable and must be reported as wages.

Same-Day vs. Overnight Travel

Per diem is only eligible when travel requires an overnight stay or rest. Same-day travel does not qualify as “travel away from home,” so meal allowances in those cases are taxable wages under IRS and Arizona rules.