When you receive a Form W-2 from your employer each year, you will see that the form lists per diem separately from ordinary income (such as that in the wages and tips column.) This is because per diem is taxable income in some instances and nontaxable in other instances and, therefore, must be accounted for separately.
In most cases, employees will submit regular reports of their travel, meal and lodging expenses to their employer. Where this is the case, and the per diem payment is less than the federal rate established for that area, per diem is not taxed to the employee. The employer may deduct these per diem payments as an ordinary business expense.
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For tax reporting purposes, the employee's expense reports must contain the following information, at minimum: the purpose of any trips taken for business purposes, the destination or destinations of the trip, the dates and any receipts for lodging. However, if the employer is using a per diem rate that includes lodging costs, lodging receipts are not necessary.
The IRS will consider per diem payments taxable to the employee if the employee fails to file an expense report, if the expense reporting is inadequate or if the employer pays the per diem to the employee without requiring any reporting. Additionally, if the employer pays an amount greater than the federal per diem for the area, the difference between the federally authorized per diem and the actual amount paid is taxable to the employee.