How Does Per Diem Work — and Is It Taxable?

The federal rate comes in two parts: a lodging figure and an M&IE figure — meals and incidental expenses. Some employers pay both, some pay M&IE only and put you in company housing, some roll it all into one daily number.

On a job site you will hear per diem used loosely for any daily money. For tax, only two things matter: whether it is paid under an accountable plan, and how it compares to the federal rate for that locality.

Localities without their own figure fall back to the standard CONUS rate. The Department of Defense sets rates for Alaska, Hawaii and the territories; the State Department sets foreign rates.

One point that catches people out: the rate is set by where the work is — not where you live, and not where your employer is headquartered. A Houston company sending you to Bakersfield owes the Bakersfield conversation, not the Houston one.

And because the rate changes on October 1 rather than January 1, a job that spans the fall can sit under two different figures.

An accountable plan has three requirements:

• There is a business connection — the expense was incurred doing your job.
• You substantiate the expenses to your employer within a reasonable time.
• You return any excess within a reasonable time.

Miss any one of the three and it is a non-accountable plan, and the whole payment is generally treated as wages.

This is why two people on the same job, taking home the same money, can get different W-2s. Nothing about the work changed — only how the employer set the arrangement up.

Which is worth knowing before you take the job, not after. A $150-a-day offer in a locality with a much lower federal rate is not $150 of the same kind of money, and the difference lands on your W-2.

This is the trap in the whole subject. People hear "per diem means no receipts" and stop keeping anything at all.

What the arrangement covers is the amount — you do not have to prove you really spent $68 on dinner. What it does not cover is where you were and when, and that half is still on you.

A dated log of the days you worked away and the locality you worked in is the entire record for most travelers, and it takes seconds a day to keep and hours to reconstruct.

Do not read anything into the label on the pay stub. "Subsistence", "living allowance", "truck pay", "stipend" and "per diem" all describe the same thing in different yards. Ask how it is administered, not what it is called.

Which changes the ground under the payment, because you are no longer away from home while you are working there. The one-year rule and the expectation test behind it are on the tax-home page.