Traveling and a travel budget go together, so looking for ways to save money and stay within that budget are at the forefront of a travel manager's mind. Businesses want to save money where they can, and having a clear understanding of how these expenses should be handled when it comes to the tax season can help.
As employees hit the road, businesses will often give an employee a per diem to use towards travel expenses. But what exactly is a per diem, and how is it used? And critically, for employers, what should be done about per diem regarding taxes and tax deductions.
To help answer these questions in more detail and ensure you are doing things correctly, we have created a helpful article to explain the ins and outs of per diem and taxes.
What is Per Diem?
Per diem is Latin for "by the day," and in the conventional context, it means an allowance paid by employers to their employees to cover various travel expenses. This fixed dollar amount is a simplified alternative to reimbursement that is based on detailed expense records.
How is Per Diem Used?
What expenses and travel costs do per diems cover? It can cover meals and tips, lodging, and incidental expenses such as laundry, dry cleaning, and other miscellaneous fees. Employers can decide to institute a per diem that covers both lodging and meal costs or one that covers only meals and incidental expenses (known as M&IE). An M&IE per diem covers all meals, as well as room service, service tips, and other expenses.
Typically, the General Services Administration (GSA), an independent agency of the United States government, sets the annual rate for per diem within the Continental U.S. The Department of Defense sets the non-foreign rate for Alaska, Hawaii, and U.S. territories. Finally, the State Department establishes the foreign rate for anywhere outside of the U.S.
Per diem rates vary by location, with major cities typically having the maximum amount of per diem. Those areas not generally associated with business travel have lower per diem rates.
Is Per Diem Tax Deductible for Employers?
If standard criteria are met, then per diem is not included in an employee's wages. That also means it is not taxable income for the employee. For this to be true, an expense report must be filled out and submitted. It must include the location and date of the trip, the time of the meal or activity, and the business purpose of the trip.
For employers, the answer is yes, per diem is tax-deductible. The next question is how to write off per diem on taxes. An employer will input meals and incidentals as a food and beverage expense on their tax form. However, the limit on meal expenses is a 50% deduction. This means that if your employee spent $100 in per diem on meals, you could only claim $50 on your taxes.
To learn more about per diem tax deductions and other travel-related issues, partner with CLC Lodging. We'll help streamline your business-employee travel management processes and policies and ensure comprehensive reporting to help optimize your travel needs.
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