How should companies handle the tax treatment of per diem payments for hotels when the amount paid is less than the GSA hotel rate and no separate meal allowance is provided?
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When a company pays an employee a per diem for hotel (lodging) expenses that is less than the applicable federal per diem (GSA) lodging rate, and does not provide a separate meal allowance, the tax treatment and deductibility of the payment depend on several key factors under the Internal Revenue Code, Treasury Regulations, and IRS guidance.
1. Substantiation and Accountable Plan Requirements
To be excluded from the employee’s income and to be deductible by the employer, the per diem arrangement must qualify as an accountable plan under IRC §62(c) and Treas. Reg. §1.62-2. This requires:
- The expense must have a business connection (incurred while performing services as an employee).
- The employee must substantiate the time, place, and business purpose of the travel within a reasonable period.
- The employee must return any excess reimbursement within a reasonable period.
If these requirements are met, the per diem is not included in the employee’s income and is not subject to withholding or employment taxes.
2. Per Diem for Lodging Only (No Meals Provided)
When a per diem is paid only for lodging (i.e., hotel), and no separate meal allowance is provided, the following rules apply:
- Substantiation: The amount of the expense deemed substantiated is the lesser of the per diem allowance paid or the federal per diem rate for lodging for the locality of travel.
- No Meals Included: If no meal allowance is provided, the employer does not need to allocate any portion of the per diem to meals, and the entire per diem is treated as lodging.
- No Standard Lodging Allowance: There is no “standard lodging allowance” analogous to the standard meal allowance. Lodging expenses must be substantiated by actual cost or by a per diem arrangement that does not exceed the federal per diem rate for lodging.
3. Deductibility and Employee Tax Consequences
- If the per diem is less than or equal to the GSA lodging rate: The amount is deemed substantiated, and if the accountable plan rules are met, it is not included in the employee’s income and is fully deductible by the employer as a travel expense.
- If the per diem is less than the GSA lodging rate: The employer may only deduct the actual per diem paid. The employee cannot claim any additional deduction for unreimbursed lodging expenses unless they are in a category of employee (e.g., Armed Forces reservist, qualified performing artist, fee-basis state or local government official, or employee with impairment-related work expenses) who is permitted to deduct unreimbursed employee business expenses “above the line”.
4. No Separate Meal Allowance
- If no meal allowance is provided, the employer does not need to apply the 50% limitation under IRC §274(n) to any portion of the per diem, since the entire amount is for lodging.
- The employee cannot claim a deduction for meals unless they paid for meals out of pocket and are otherwise eligible to deduct unreimbursed employee business expenses.
5. Reporting
- Employer: If the per diem is paid under an accountable plan and does not exceed the federal per diem rate, it is not reported as wages on Form W-2.
- Employee: If the per diem is less than the federal rate and the employee incurs higher actual expenses, the excess is not deductible unless the employee is in a special category as noted above.
6. Summary Table (from IRS Publication 463 and Rev. Proc. 2019-48)
- Per diem ≤ GSA lodging rate, no meals: Not taxable to employee, fully deductible by employer, no 50% meal limitation applies.
- Per diem < GSA lodging rate, no meals: Same as above, but deduction limited to actual per diem paid.
7. Citations
- IRC §62(c); Treas. Reg. §1.62-2 (accountable plan rules)
- Rev. Proc. 2019-48 (per diem substantiation rules)
- IRS Publication 463 (2024), “Per diem rates” and “Standard meal allowance”
In summary: If a company pays a per diem for hotel expenses that is less than the GSA lodging rate and does not provide a separate meal allowance, the per diem is not taxable to the employee and is deductible by the employer as a travel expense, provided the arrangement meets the accountable plan requirements. No portion is subject to the 50% meal limitation, and the employee cannot claim any additional deduction for unreimbursed lodging or meals unless they are in a special category of employee permitted to do so.
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