Travel-related expenses can be tricky to understand, even in the best of times. Fortunately, federal per diem rates help simplify travel expenses for employees and employers alike. To teach you about these rates, we’ve prepared a quick guide for you and your clients to manage the finances.
What Are Federal Per Diems?
Per diem rates are essentially rates that the federal government sets in order to help employers budget for the cost of travel. Employers can reimburse their employees for travel expenses based on these rates instead of the actual cost of hotels, cab fares, and restaurant meals.
How Per Diem Rates Are Set
The federal government establishes federal per diem rates through regulations. These regulations set the maximum amount employees can claim for food and incidental expenses. The rates for lodging and transportation costs are updated yearly. For the fiscal year 2022, the standard rate for meals and incidentals is $59, while the standard for lodging is $96.
The General Services Administration (GSA) also sets rates for around 320 specific destinations where the cost of living tends to be higher than average, including Hawaii, Alaska, and U.S. territories. Foreign per diem rates are set by the Department of State and are updated monthly. Per diem rates for U.S. territories are set by the Department of Defense.
Per Diem Rates from the IRS
Employers must use the IRS simplified “high-low” rates for federal employees if their location is in an area with a higher cost of living. These rates are published in IRS Notice 2021-52. Yet most private employers choose to use the GSA rates instead because they vary less from year-to-year and are easier to use.
Federal Per Diems Are Not Taxable
Employees do not include per diems in their taxable income. However, they will still be important when filing taxes. Per diems must be reported on an expense report, including travel date, location, and business purpose.
Additionally, the per diem rate must fall within the allowances set by the GSA; anything above this is considered wages and is taxed. If the employee is not reimbursed for the expense, they can claim them as a deduction if their expenses exceed 2% of their Adjusted Gross Income.
Can employers deduct per diem?
Employers can deduct most of their spending for meals, lodging, and incidental items on business trips as long as they spend within a given number of dollars per diem. This includes deductions for lodging when the trip expenses are higher than the per diem limit. The federal per diem compensation method usually simplifies their bookkeeping and deductions since they no longer have to keep track of every spending item on their expense report.
However, a sole proprietor cannot use the lodging rates when traveling on business. Instead, they must keep track of every single expense during the trip, even if the spending is less than $75. In general, business owners will incur the same amount of paperwork as employees with regard to their expense claims.
Conclusion
Overall, per diems are an excellent tool for employers to use in order to track their business travel. It’s not always easy to figure out what taxes and fees you’re legally required to pay when finding out the cost of your trip. However, per diems are a standard rate that will help simplify that process.
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