A lot of confusion surrounds the “per diem” payments that many travelers receive that covers lodging and meals.
These payments are usually paid on a tax free basis assuming that the traveler has a qualifying tax home. Per Diems are also called allowances, stipends, subsidies and reimbursements, but more specifically, are paid for lodging and meals – not transportation.
The per diem concept can be summed up with this illustration:Suppose you and 99 other people were sales reps for a medical manufacturing company. Your weekly activity consisted of traveling to potential buyers, spending nights in hotels and eating out. When you returned, you handed all of your receipts to a human resources staff member that processed reimbursement checks for you and the other 99 sales agents. What seems to be a simple process is now 99 times larger and if this occurs each week, your employer would commit a full time staff member to this task alone.
Enter the per diem.
Since the Federal government has a LOT of traveling employees a system was designed where the costs for lodging and meals was standardized for every locality in the world. The system allowed the employer to use these standard rates as the reimbursement amount for lodging and meals without the exchange of receipts, disregarding the actual expense of the employee. In effect, the employer pays the per diem rate and so long as the employee had a reasonable expense and the rest is theirs to keep regardless of the amount of the expense unless there was NO expense at all (like a trucker sleeping in their cab).
This is an important concept for another reason – this is how ones makes money as a traveler- by taking the per diem and finding cheaper lodging. The rest is theirs to keep and so long as they have a qualifying tax residence, the entire payment is free of tax or more accurately, “excluded from gross wages subject to tax”.
If you need additional information or assistance on tax or tax-free issues, please contact Joseph Smith at TravelTax.com
Note from Gypsy Nurse:
If you accept tax-free per diem, it’s imperative that you are following the IRS guidelines of ‘Duplication of Expenses’ and have a valid Tax Home. I’ve worked both as a per-diem employee as well as an itinerant (all taxed) employee and to be honest, I don’t see a ton of difference in the take-home amounts. The flexibility (for me) of not having to maintain a tax-home has been worth the small difference in take-home.
It’s also important to note that you will not likely receive the full Government GSA rate for any given location. It is however important that you do NOT receive over this government designated rate.