What is per diem? A small business guide
Per diem is a fixed daily allowance you pay staff for work travel. Here's how it works for your business.
Written by Kari Brummond—Content Writer, Accountant, IRS Enrolled Agent. Read Kari's full bio
Published Friday 18 September 2026
Table of contents
Key takeaways
- Per diem is a fixed daily allowance you pay staff to cover travel costs like lodging, meals, and incidentals, so you don't have to reimburse them for itemized receipts.
- The GSA sets standard federal per diem rates each year, and the FY2026 standard rate is $178 a day ($110 lodging plus $68 for meals and incidental expenses).
- Per diem paid within federal rates under an accountable plan is generally tax-free to the employee and deductible for your business, while anything above the rate counts as taxable wages.
- "Per diem" can also mean as-needed, day-to-day employment, which is different from a travel allowance.
What does per diem mean?
In business, it's a fixed daily amount you give an employee to cover the costs of work travel, so you can skip the itemized receipts – as long as you meet a few requirements. The meaning of "per diem" comes straight from Latin: "per day" or "by the day."
You'll also see "per diem" used to describe certain types of contract work arrangements, which is a separate meaning. That one's covered further down.
What does a per diem cover?
A federal per diem splits into two buckets: lodging in the first bucket and meals and incidental expenses (M&IE) in the second. Together they cover the everyday costs your employee runs up while away for work.
Here's what a typical per diem covers:
- Lodging: This is the nightly hotel or accommodation cost, up to the set rate.
- Meals: Breakfast, lunch, and dinner while traveling fall under the M&IE portion.
- Incidentals: Small extras like tips for service staff and fees count as part of the M&IE portion, too.
A per diem usually doesn't cover airfare, mileage, or ground transport. You'd normally reimburse those separately, based on actual costs or a mileage rate.
Per diem vs per diem employment: What's the difference?
The word "per diem" carries two meanings, and mixing them up is easy. One is the travel allowance you've read about so far; the other describes temporary or on-demand daily work arrangements.
Per diem employment means as-needed, day-to-day work rather than a set schedule. You'll see it a lot in healthcare and nursing, construction, and trucking, where contractors pick up shifts as demand comes in.
For your employee travel reimbursements, the allowance meaning is the one that matters.
What are the current per diem rates?
The General Services Administration (GSA) sets standard federal per diem rates each fiscal year for the continental United States (CONUS). These rates give you a reliable benchmark, so you don't have to guess a fair daily amount, but as a business owner, you can also set your own rates as long as they're under the GSA's rates for the year
The FY2026 standard rate is $178 a day, made up of $110 for lodging and $68 for M&IE. It runs from October 1 2025 to September 30 2026. High-cost locations run higher, with M&IE tiers from $68 to $92 and lodging up to about $258 a night or even higher in some cases.
While the standard rate stays the same for the full fiscal year, local per diem rates may fluctuate throughout the year – for example, the daily per diem lodging rate in Aspen, Colorado is $407 from December 2025 through March 2026 but only $207 for the rest of the year. The shift is to accommodate higher prices during ski season in that area.
You can use the GSA figures or the IRS "high-low" method, a simplified approach that applies one rate to high-cost areas and another to everywhere else. You can check current figures on the GSA per diem rates page. Rates refresh each federal fiscal year, so it's worth a quick review every fall.
How is per diem calculated?
Per diem is simple to work out: take the daily rate and multiply it by the number of full travel days. The one twist is that the first and last day of travel are each paid at 75% of the M&IE rate, not the full amount. Again, business owners can opt to use a lower rate – but the calculations for the first and last day should be consistent.
Say an employee takes a three-day trip to a standard-rate city at $178 a day. The single full day in the middle is eligible for the full per diem rate, and the two travel days are reimbursable at 75% of the $68 M&IE portion. The per diem lodging rate applies to the days the employee was gone overnight. Here's what that looks like in this example:
- Day 1: $110 lodging, $51 M&IE
- Day 2: $110 lodging, $68 M&IE
- Day 3: $68 M&IE
A quick per diem calculator or a spreadsheet handles the math in seconds.
How does per diem reimbursement work?
Per diem works best under what the IRS calls an accountable plan. In plain terms, your employee submits a short expense report showing the business purpose, dates, and location of the trip, but doesn't need itemized receipts for amounts within the per diem rate.
You set the policy that fits your business. You can pay the full GSA rate, a lower flat amount, or just the M&IE portion if you book and pay for lodging directly. You can also use a rate that's higher than the GSA's per diem rates, but you must report any reimbursements over the standard rates as wages to your employee.
Keeping travel expense reimbursement consistent makes your books cleaner and your team's claims faster, and simple employee reimbursement tools keep every claim in one place.
Is per diem taxable?
Within federal rates and under an accountable plan, per diem is generally not taxable to the employee and is deductible for your business – but you're still limited to only deducting 50% of meal expenses. That's the outcome you want, and it's the reason the rules above matter.
Two things change that. Amounts above the federal rate, or payments made without a proper expense report, become taxable wages and get reported on the employee's W-2. You get to deduct the wages on your business tax return, but due to payroll taxes, you'll often end up spending more than you would have if you had just reimbursed the employee under an accountable plan.
Also, your employees must return any excess payments within a reasonable time frame, or you can lose your accountable plan status. If your plan becomes nonaccountable, the reimbursements become taxable wages to your employee.
The IRS guidance on travel and per diem spells out how to keep payments on the tax-free side.
Pros and cons of using per diem for your business
Per diem can save you time and give you predictable travel costs, though it isn't a fit for every trip. Weigh both sides before you roll it out.
Here's what works in your favor:
- Predictable costs: You know the daily spend before anyone leaves.
- Less admin: Staff skips the receipt-by-receipt claims for covered items.
- Simpler for staff: Employees get a clear daily budget to plan around.
Here's what to watch:
- Possible over or underpayment: A flat rate can miss the mark for a given city or certain types of meals.
- Policy upkeep: You need a clear, written policy so everyone applies it the same way.
- Rate changes: Federal rates update each year, so your figures need a yearly check.
How to set up per diem reimbursements for your team
Setting up per diem takes a handful of decisions and a short written policy. Work through these steps, and you'll have a system your team can follow on every trip.
1. Decide which trips qualify
Set clear rules for when per diem applies, such as overnight travel away from the usual workplace. If you decide to reimburse employees for day trips (for example, a conference), research the rules as you can't include this in your accountable plan.
2. Pick your rates
Choose the GSA rates for each destination, use the IRS's high-low rates, or set a flat daily amount that suits your business. Match the rate to where staff actually travel, and be consistent through the year.
3. Write a simple policy
Put the rules in writing: who qualifies, the rates, and what an expense report needs to show. A one-page policy is enough for most small teams.
4. Require a short expense report
Ask staff to log the business purpose, dates, and location for each trip. This keeps you inside an accountable plan and your payments tax-free.
5. Track and record payments
Record each per diem payment in your books so it's ready at tax time. Good expense tracking means you always know what travel is costing you.
Track travel expenses with less admin
Managing travel costs gets a lot easier when everything sits in one place. Xero brings per diem payments, expense reports, and your wider finances together, so you spend less time on paperwork and more time running your business. Try it today and get 90% off for six months.
FAQs on per diem
Here are quick answers to the questions small business owners ask most about running a per diem policy.
What does $100 a day per diem mean?
It means you'd pay that employee a flat $100 for each qualifying travel day to cover lodging and meal costs. If $100 sits above the federal rate for that location, treat the excess as taxable wages.
Is per diem a good thing for a small business?
For many small businesses, it is, because it caps your travel spend and cuts the receipt admin your team has to file. It works best when trips are frequent enough to justify a written policy.
Do employees need receipts for per diem?
They don't need itemized receipts for amounts within the per diem rate under an accountable plan, but they do need to file an expense report with the purpose, dates, and location. Keep those reports on file to support your deduction.