When per diem is (and isn't) taxable
Under an accountable plan, per diem is not taxable income to the employee when three tests are met: there's a business connection, the expense is substantiated (time, place, business purpose), and any excess is returned. Reimburse at or below the GSA rate and meet those tests, and nothing is reported as wages.
If the employer pays more than the federal rate, the excess is taxable and reported on the W-2. If there's no accountable plan, the entire payment is taxable wages.
The high-low substantiation method
Instead of looking up every city, employers may use the IRS high-low method: one flat rate for designated high-cost localities and a lower rate for everywhere else in the continental U.S. It trades precision for administrative simplicity.
First/last day and provided meals
The same mechanics as the GSA rates apply for tax purposes: the first and last day of travel are figured at 75% of the M&IE rate, and employer- or conference-provided meals reduce the day's allowance. (This is general information, not tax advice — see IRS Publication 463 and consult a tax professional.)
Frequently asked questions
Is per diem taxable?＋
Not when paid at or below the federal rate under an accountable plan with proper substantiation. Amounts above the federal rate, or payments outside an accountable plan, are taxable wages.
What is an accountable plan?＋
An IRS framework requiring a business connection, substantiation of expenses, and return of any excess. Reimbursements under it are tax-free and not reported on the W-2.
What is the high-low method?＋
An IRS shortcut that uses one per diem rate for high-cost localities and a lower rate for all other continental-U.S. locations, instead of city-by-city lookups.