How is a per diem allowance calculated?

There are three different methods of calculating per diem allowances. They are as follows:

Per diem allowance. The per diem allowance method is used for reimbursing lodging, meal and incidental expenses. Under this method, the amount deemed substantiated is equal to the lesser of the per diem allowance or the amount computed at the federal per diem rate for the locality of travel for the period the employee is away from home. (The federal per diem rate is the General Services Administration rate paid by the federal government to its workers on travel status. It is equal to the sum of the federal lodging expenses rate and the federal meals and incidental expenses (M&IE) rate for the locality of travel.)

Meals-only per diem allowance. A per diem allowance is treated as paid only for meals and incidental expenses if:

• the employer pays the employee for actual lodging expenses;

• the employer provides the lodging in kind;

• the employer pays the costs of the lodging directly to the provider;

• the employer does not reasonably believe that lodging expenses were or will be incurred by the employee; or

• the allowance is computed on a basis similar to that used in computing the employee's wages or other compensation (e.g., the number of hours worked, miles traveled, or pieces produced).

An employee who is paid a per diem allowance for travel costs under an employer's accountable plan that covers only meals and incidental expenses is deemed to have substantiated such expenses to the lesser of the allowance or the amount computed at the federal M&IE rate of the locality of travel away from home.

The federal M&IE rate must be prorated for partial days of travel away from home. A full day of travel is from 12:01 a.m. to 12:00 midnight. For each six-hour period or portion thereof that the employee is traveling away from home, the employer is allowed one-fourth of the applicable rate. Alternatively, the employer may prorate using any method that is consistently applied and is in accordance with reasonable business practice.

The federal M&IE rate may not be used to meet the necessary substantiation requirements if the employer and employee are related.

High-low substantiation method. In lieu of actual per diems, employers may use the IRS’s simplified high-low substantiation method, which provides a uniform per diem rate for all high-cost areas and all low-cost areas within the continental United States. Employers may use these rates instead of the extensive list of federal per diem rates for specific localities.

If the per diem rate paid by an employer to an employee for lodging and meals and incidental expenses does not exceed the uniform rates (and the employee meets simplified substantiation requirements), then the reimbursement is deemed to be made under an accountable plan and, therefore, is not subject to payroll and income tax withholding.

Fiscal 2009 rates. For expenses paid on or after October 1, 2008:

• The federal per diem rate is $256 per day for high-cost areas and $158 per day for all other areas; and

• The federal M&IE rate for purposes of the high-low substantiation method is $58 per day for high-cost areas and $45 per day for all other areas.