Per diem is as much a tax tool as a reimbursement policy. Done right, per diem paid at or below the federal rate is excluded from an employee's wages and fully deductible by the employer. Done wrong, the excess becomes taxable wages and the deduction can be lost. This guide covers the 2026 rules end to end.

The Accountable Plan: The Key to Tax-Free Per Diem

For per diem to avoid becoming taxable wages, the arrangement must be an accountable plan (Treas. Reg. §1.62-2): the employee must substantiate the amount, time, place, and business purpose of the travel, and must return any excess reimbursement. Employers that meet these tests exclude the per diem from Form W-2 wages.

  • Substantiation: date, destination, business purpose.
  • Return of excess: money above the federal rate must be returned within a reasonable period.
  • Rate cap: paying above the GSA rate turns the excess into taxable wages.

Which Rates Can You Use for 2026?

  • GSA per-locality: the FY2026 table ($178 standard, up to $471 Nantucket) for exact destinations.
  • IRS high-low: $319 / $225 for simplicity.
  • Incidentals only: $5/day.

All three are published for the period Oct 1, 2025 – Sep 30, 2026. The IRS also allows the first three months of a calendar year to use the prior year's rates under transition rules. (Rev. Proc. 2019-48 §4.06.)

Meals: The 50% Deduction Limit

Employers can deduct only 50% of meal expenses (IRC §274(n)). Under the GSA method, the meal portion is the M&IE minus incidentals; under high-low it is $86/$74. The lodging portion and incidentals are fully deductible.

For 1099 Contractors

Independent contractors can deduct their own travel expenses — including per diem — on Schedule C, using the same GSA or high-low rates, subject to the 50% meals limit and the 2%-of-AGI floor for unreimbursed employee expenses (which no longer applies to W-2 employees, so the per diem route matters most for businesses and self-employed individuals).

Common Mistakes

  • Paying above the federal rate without treating the excess as wages.
  • Failing to substantiate time, place, and purpose.
  • Not returning excess advances.
  • Ignoring the 50% meals limit on the deduction side.

Build an Audit-Ready Record

Use the DayFig trip calculator to generate a dated itinerary with per-city rates and the 75% rule — the four substantiation elements in one printable report. Then keep the rate table reference (GSA or IRS notice) with your records.

Sources: IRS Rev. Proc. 2019-48; Notice 2025-54; IRC §274(n); Treas. Reg. §1.62-2; IRS Pub. 463. This is not tax advice — consult a CPA for your situation.