Business travel costs can be a logistical nightmare for both small business proprietors and human resource departments. When it comes to following each and every folded bill in the case of a coffee or taxi ride, it is an option, but most companies prefer an easier method: per diem payments.

However, it is not that easy to give employees a daily allowance by simply giving them cash. With the 2025 GSA per diem rates and IRS rules for accountable plans in mind, here’s everything you need to know about per diem payroll compliance.

What is Per Diem?

"Per diem" is Latin for "by the day." In a payroll situation, it is a daily allowance that is given to an employee as a fixed amount that includes out-of-pocket costs (lodging, meals, and incidental expenses or M&IE) that the employee needs when traveling to work.

Instead of a per diem reimbursement based on actual costs (where employees submit every receipt), employers provide a flat rate. This simplifies recordkeeping and gives employees more flexibility during their trips.

Per Diem IRS Rules: Is it Taxable?

The most asked question is: Is per diem taxable income? The answer depends on whether your company uses an Accountable Plan. Under an accountable plan, per diem payments are not taxable and do not need to be reported on an employee’s W-2, provided:

1. Business Connection: The expenses must be business-oriented.
2. Substantiation: The employee has to report on the date, location, and purpose of the trip.
3. Returning Excess: When you pay an advance that is more than the time you have actually travelled, the employee should be returned the excess within a reasonable period (typically interpreted as 120 days in practice, but check your plan rules).

When does per diem become taxable?

• Excess Payments: When you pay an amount of money exceeding the federal per diem rate, then this excess would be considered as wages and would be subject to withholding of income tax and payroll taxes.
• Missing Reports: If the employee fails to provide timely substantiation of expenses. IRS guidance suggests submitting reports within a reasonable period, often interpreted as 60 days, but this can vary based on your plan.
• The One-Year Rule: IRS guidance evaluates whether the employee’s travel qualifies as ‘away from home.’ Per diem may become taxable if the employee establishes a new tax home or is away for an extended period. There is no automatic ‘one-year rule,’ so review each situation carefully.

2025 Per Diem Rates: GSA vs. High-Low

The General Services Administration (GSA) and the IRS revise the rates on an annual basis on the first of October each year. Two primary methods of computing payments can be used, based on the 2025 fiscal year (Oct 1, 2024 -Sept 30, 2025).

1. The Regular GSA Method (CONUS)

Prices depend on the individual city and county. A night in New York City has a much higher per diem rate than a night in a small rural town.

• Standard Rate (2025): $178 per day ($110 for lodging + $68 for M&IE).
• Non-Standard Areas (NSAs):  It has 296 places (such as Los Angeles or Chicago) where rates are considerably higher because of the cost of living.

2. The High-Low Substantiation Method

To simplify per diem payroll processing, the IRS allows the "High-Low" method. This categorizes locations into "high-cost" areas and "all other" areas. Instead of looking up every city, you use one of two flat rates.

Note: While FY 2026 rates remain the same as FY 2025, they are subject to change annually by the GSA. While the IRS will continue to use these rates for tax substantiation, rates may change in future fiscal years.

Source: https://www.irs.gov/pub/irs-drop/n-25-54.pdf

Per Diem for Remote and Field Staff

The emergence of distributed teams has made per diem difficult among remote workers. Generally, per diem is intended for travel "away from home."

• Field Staff: Per diem is easy in the case of construction crews or technicians traveling to job sites.
• Remote Workers: In case a remote worker visits the corporate headquarters within the course of a week and makes some trips to the office, the employee will qualify to receive per diem. IRS rules define per diem for travel ‘away from home’. Travel within normal commuting distance does not qualify, and such payments are treated as taxable wages. Employers should document travel purpose, distance, and time to support per diem eligibility.

How to Pay Per Diem in Payroll: Step-by-Step

In case you are in doubt about how to pay per diem, the following are the best practices to use to comply:

1. Establish a Written Employer Per Diem Policy

Make it clear what should be included in per diem or what qualifies it. Will you pay for the full day on travel days? The IRS usually allows 75% of the M&IE rate for the first and last day of travel.

2. Separate Per Diem from Wages

You must make sure that when processing payroll, the per diem is entered as a reimbursement or non-taxable allowance and not as regular gross pay. This guarantees that you do not pay FICM (Social Security/Medicare) or FUTA (Unemployment) taxes more than you should. Always confirm with your payroll provider or tax advisor to ensure proper coding.

Note: Ensure correct IRS reporting codes are used. For example, for non-taxable per diem under an accountable plan, use Code L on Form W-2 if needed, rather than reporting as regular wages.

3. Maintain Digital Recordkeeping

Even without receipts for every meal, you must keep per diem record documentation. Use a digital system to track:

• Departure and return dates/times.
• Destination (City, State, Zip).
• The business purpose (e.g., "Client Meeting with X Corp").

4. Implement Automated Payroll Software

The best way to handle per diem is through a per diem payroll solution. The current software is able to automatically impose GSA rates based on location and flag all payments that are beyond the tax-free threshold. This saves time and money on manual errors and keeps you safe in case of a payroll tax audit.

Per Diem vs. Actual Expenses: Which is Better?

Conclusion: Staying Compliant in 2025

Working per diem is a win-win: you will limit the amount of paperwork to be handled by your accounting department, and your traveling staff members will have an estimated daily budget. However, per diem payroll compliance requires staying on top of annual rate changes and ensuring your "accountable plan" meets all three IRS requirements.

Always check current IRS notices and GSA per diem updates each fiscal year, as rules and rates may change.

Are you still manually resolving travel reimbursements? You may want to consider outsourced payroll compliance services, such as PayProNext, to reimburse per diem.