Is per diem taxable? Accountable plans and the federal rate

For an employee, a per diem allowance for business travel away from home is generally not taxable when two things are true: the employer pays it under an accountable plan, and the allowance is no more than the federal rate for the trip. IRS Publication 463 says such an allowance is not included in box 1 of Form W-2, and the employee does not report the allowance or the related expenses if the expenses are no more than the allowance.

Anything paid above the federal rate, or paid under a plan that does not meet the accountable-plan rules, is treated as pay.

1. Business connection. The expenses were paid or incurred while performing services as an employee.
2. Adequate accounting. The employee accounts for the expenses within a reasonable period. For a per diem, that means proving the dates, place and business purpose of the travel; the allowance itself can stand in for the amount when it is no more than the federal rate.
3. Return of excess. Any advance or allowance beyond what was accounted for is returned within a reasonable period.

Publication 463 lists safe-harbor timings: an advance received within 30 days of the expense, accounting within 60 days after it was paid or incurred, and excess returned within 120 days (or within 120 days of an at least quarterly statement). If the employee is related to the employer, for example by owning more than 10% of a corporate employer, the per diem alone does not prove the amount of the expenses to the IRS.

If the allowance is more than the federal rate, the employer reports the amount up to the federal rate in box 12 of Form W-2 with code L. That part is not taxable. The excess is included in box 1 as wages.

Illustration (full days only; first and last travel days are prorated in practice): an employer pays lodging directly and gives $100 a day for meals and incidentals during four days in a locality with a $92 M&IE rate, such as Boston / Cambridge in FY2027. The federal rate covers 4 × $92 = $368, reported with code L. The remaining 4 × $8 = $32 is wages in box 1.

Under a nonaccountable plan, reimbursements are reported as pay. Excess amounts not returned, and reimbursements for non-deductible expenses, are treated the same way even when the rest of the plan is accountable.

The IRS accepts three ways to set the federal rate for per diem: the regular federal per diem rate published by GSA for each locality (the rates in this directory), the standard meal allowance (the federal M&IE rate) when only meals and incidentals are covered, or the high-low rate published each year in an IRS notice. Publication 463 says to use the rate for the locality where the traveler stops for sleep or rest.

Partial travel days are prorated: 3/4 of the M&IE amount on the departure and return days, or another method applied consistently under reasonable business practice. This matches the 75% rule used for federal travel; see first and last day of travel.

Self-employed people do not use per diem reimbursements the same way and report expenses on their own business schedules. Form 2106 is limited to specific groups, such as Armed Forces reservists and fee-basis government officials. Meal deductions can be limited separately. This page summarizes Publication 463 (2025 returns) and the current IRS notice for orientation; it is not tax advice. Confirm the treatment of a specific plan with the employer or a tax professional.