When an employee travels on business, he's probably got some deductible expenses. To keep the accounting simple, the Internal Revenue Service allows employers to pay and deduct per diem rates; the boss only needs to keep track of standard daily rates for food, lodging and other expenses, instead of asking employees to bring in receipts for the actual costs. If the employer doesn't reimburse the employee, the employee can deduct actual expenses or standard daily rates.
Reimbursements and Income
In the view of the IRS, an employee who receives a per diem allowance for business travel is receiving reimbursement from the employer. Any per diem allowance over and above the expenses reported by the employee is income and is reported on the employee's W-2 form. If the employee's wages include business travel expenses, there are no reimbursements, no deductions by the employee and no additional income reported to the IRS.
High Low Rates
Per diem allowances are set by the IRS. An employee covered by these allowances doesn't need to keep track of individual expenses, although he must document the time, place and purpose of the travel. Employers can also use "high low" rates that account for higher expenses in certain areas, such as Alaska or Hawaii. If the high-low rates are used for one employee's travel, they must be used again for all other travel by that employee during the tax year. Some high-low rates are seasonal, meaning they only apply at "high season" times during the year in certain locations: Sedona, Arizona, in March and April, for example, or Miami during the busy tourist season from January through March.
For employees, the IRS sets standard rates for certain business travel expenses. For meals, a standard daily allowance varies according to the travel destination. A standard mileage rate also covers business use of a vehicle, which allows workers to avoid keeping track of gas, insurance, parking, tolls and all the other incidentals associated with use of a car or truck. Employees itemize and claim these expenses, both standard and actual, on Form 2106. The total shows up on Schedule A, which lists all itemized deductions for individual returns. Only the amount that exceeds 2 percent of adjusted gross income is deductible.
Fiscal Year Rates
For fiscal year 2015, starting Oct. 1, 2014, the employer per diem rates reached $172 for lodging and meals; the per diem for high-cost areas reached $259. These reimbursements are not subject to income tax withholding or payroll taxes, nor are they reported on the W-2. Per diem rates for lodging are not available to individuals who are self-employed, but they may use one standard allowance for meals and another for incidental expenses on days they don't use the meal allowance. They report these and any actual expenses as deductions on Schedule C. The same rules apply to anyone with significant ownership of the company, which the IRS defines as 10 percent or more.
- IRS.gov: 2013-2014 Special Per Diem Rates
- IRS.gov: Publication 463 -- Travel, Entertainment, Gift, and Car Expenses
- IRS.gov: Topic 511 -- Business Travel Expenses
- IRS.gov: Form 2106 -- Employee Business Expenses
- WSRP: Business Travel Per Diems May Simplify Expense Reporting
- AccountingWeb: IRS Freezes Per Diem Rates for 2013
- IRS.gov: Instructions for Schedule C