Per diem given to employees are considered as reimbursements, therefore, it isn’t taxable. However, it can also be considered as taxable income in some cases.
As long as the employer reimburses the employee based on the federal per diem rate, it isn’t going to be taxable. Nevertheless, the employer must follow the IRS requirements for an accountable plan. If not, it means the plan is non-accountable, thus, the per diem along with any other reimbursement will be counted as employee’s compensation.
Having said that, the per diem given by the employer must meet the accountable plan requirements. Otherwise, it will be counted as part of the employee’s wage and must be reported Form W-2.
Accountable Plan Requirements
Right off the bat, we can say that the first requirement of an accountable plan is the employee expenses must be related to business. The employees need to keep a record of their expenses and report it to their employers.
If the employer reimburses the employee more than the expenses, the excess amount must be returned to the employer within a reasonable period of time. Under the IRS guidelines, a reasonable period of time is 120 days. If the excess amount isn’t returned back within this time frame, it will be counted as compensation.
The records by the employee may also be subject to third-party confirmation for the purpose of proving the employee expenses. The most used common third-party confirmation is—obviously the receipts. As an employee, you should keep your receipts to prove your employer the expenses.
Reimbursing More Than Per Diem Rates
As mentioned above, the excess amount of per diem must be returned to the employer within a reasonable period of time. Not just with per diem but with any other reimbursement— if the reimbursement is more than the actual expense, it will be included in the employee’s wage, thus, become taxable. The excess amount must be returned to the employer for it to be counted outside of the employee’s compensation.
This is as simple as it gets regarding the relation between per diem and taxes. There is also the case of employees keeping per diem to themselves. Since per diem is given for meals and lodging, the employee may spend less than the per diem given. In these situations, you first need to separate per diem with other reimbursements.
Considering the per diem has a set rate by the General Services Administration for all states and counties, the employee may get to keep the per diem not exceeding the federal rate. For example, assume the per diem rate for the destination is $100 and the employee spent $70. The remaining $30 isn’t considered as excess amount. The employee can keep it to himself and it won’t be taxable.