Join #1 A.I. tax service for freelancers

Resources

Home › Tax Tips › Per Diem Meals

What Is a Per Diem and How Is It Taxed?

Traveling for business reasons is a wonderful example of how self-employment deductions can substantially impact a freelancer or entrepreneur's bottom line. If you're self-employed, you can write off airfare, rideshare trips and other transportation expenses, plus your hotel or apartment share expenses, your fees for the conference or workshop you might be attending and more. It's different for people who are employees at a company.

Table of contents

Key takeaways...Read more

What does per diem mean?...Read more

What does the IRS per diem cover?...Read more

Per diems for sole proprietors...Read more

What is the standard per diem meal allowance?...Read more

How is per diem calculated?...Read more

Is per diem taxable?...Read more

Finding possible travel deductions...Read more

Key takeaways

A per diem covers daily expenses on a business trip
Companies give them to employees, but freelancers can use a per diem deduction, too
Per diems can cover meals, lodging and incidental expenses

A great perk of being your own boss is that these tax deductions are fairly widely known among self-employed people, but what they might not be aware of is something called per diem deductions. If you're on a whirlwind business trip, having meetings by day and client meals by night, or you just don't want to have to keep track of every detail of your expenses, a per diem deduction can simplify things. You can experiment by calculating your expenses using the actual and the per diem methods and see which gives you better results.

What does per diem mean?

Per diem is actually Latin for "by the day," and in the context of business expenses, it means you get a fixed daily rate for expense reimbursement. A per diem can cover all your expenses for each day during a business trip. The rates for per diems are set each year by the General Services Administration, a federal government agency that provides basic operational support for federal agencies. They vary by county. The per diem rate in San Francisco, for instance, will likely be higher in a given year than the per diem rate in Indianapolis.

What does the IRS per diem cover?

The big expenses covered by per diems are typically meals and lodging, which is normally for employees whose company provides their per diem. Per diem meals can be literally anything you eat while on your business trip. That means breakfast, lunch and dinner, whether it's takeout food delivered to your hotel room, groceries you buy at the supermarket or a high-end meal with clients at the conference you're attending.

Image comparing per diems for employees vs self-employed. Employees get coverage for meals, incidental expenses, and lodging. Self-employed only get coverage for meals and incidental expenses. No mention of taxes or 1099.

Lodging can be any place where you pay to stay the night. It can be a room in a hotel, motel, inn or resort, or an apartment share like Airbnb. As long as you're paying for a place to hang your hat during your business trip, you can include it in your IRS per diem. Incidentals are also covered as part of a per diem. These are laundry services, dry cleaning and pressing, as well as fees and tips you might give to the food servers at restaurants or concierges at hotels. A tax deduction calculator can help you find more business expenses that you can write off.

Per diems for sole proprietors

Unfortunately, if you're self-employed, a freelancer or a sole proprietors, you won't be able to use the per diem write-off for your accommodations, only for your meals and incidentals. If you want to deduct your business lodging expenses, you can still do so using the actual method, where you write off the cost of your lodging from your taxable income as an itemized deduction.

Image comparing Diem Deduction vs. Itemized Deductions for taxes. Explains fixed deduction amount vs. expenses for itemized deductions. Relevant for self-employed/1099/freelancers.

Take Julie, a children’s book illustrator, who went to a publishing conference in Philadelphia. She kept detailed records of every meal and every tip she gave, as well as the bill for her stay at a motel. After the trip, she tallies everything and decides to take the per diem deduction for her meals and incidentals because it's a larger write-off than her actual expenses for meals and incidentals. She also itemizes the cost of her motel stay to get the write-off for that individually.

What is the standard per diem meal allowance?

Julie's trip was in 2021 when the IRS per diem rates 2021 for meals and incidentals was $61 when she traveled to Philadelphia. Because the conference was catered, Julie's meal expenses each day totaled around $45. This meant that she could deduct $61 from her taxes for each day of her trip with the meal per diem, even though she only spent $45 on meals and incidentals daily. This amount is her Schedule C per diem 2021, because it is the amount that she will enter on her Schedule C tax form when she files her tax return. The General Services Administration (GSA) is always updating per diem rates. If Julie had traveled the next year, she would likely have benefitted even more from the IRS per diem rates 2022 for meals and incidentals, which are considerably higher at $79.

How is per diem calculated?

The GSA bases its calculations for IRS per diem rates 2024 on the cost of living in a given area. In bigger cities, the per diem rates are larger than in smaller cities, and the IRS per diem rates 2024 in smaller cities are larger than in non-metropolitan areas. This is to account for the higher cost of living in urban areas, where goods and services usually have a higher price. As of October 1, 2023, the special meals and incidental expenses (M&IE) per diem rates for taxpayers in the transportation industry are $69 for any locality of travel in the continental United States (CONUS) and $74 for any locality of travel outside the continental United States. If Julie's conference were in New York City instead of Philly, her meal per diem deduction would have been much higher because the cost of living in NYC is much higher than that of Philadelphia. If the conference were in San Antonio, the per diem would have been lower because goods and services don't cost as much there as they do in Philadelphia.

Alt text: Flyfin image explaining per diem amount calculation based on cost of living, with standard rate for unlisted places. Relevant for self-employed, 1099, freelancer, taxes.

You can find these rates, which are calculated annually and released on the first day of the federal government's calendar year, on the GSA's website. If the GSA hasn't listed a per diem rate for a given location, you can use the standard per diem rate for the year when taking a business trip. Just be aware that the standard rate only applies to the continental US. For Alaska and Hawaii, you'll need to use the GSA's listed rates.

Is per diem taxable?

If you're new to business travel, you might be wondering, "Is per diem taxable?" If you're an employee and your per diem comes from your employer, your per diem is not considered part of your wages, so it's not considered taxable income. For self-employed people, the per diem is a deduction from their taxable income rather than a form of income itself, so it's not taxable in that case either.

Finding possible travel deductions

With FlyFin, A.I. scans your expenses to find every possible deductible expense from your business travels. If you're unsure about an expense, expert CPAs are available 24/7 through the app to provide guidance on 1099 taxes. FlyFin can also help calculate estimated taxes so you can avoid penalties. When it's time to file your taxes, the CPAs help prepare both your state and federal tax returns and even file it for you. If you're self-employed, you can also take advantage of a variety of tax calculators FlyFin has developed specifically for freelancers, entrepreneurs and sole proprietors.

Adjust For Inflations

The IRS has released its yearly inflation adjustment for the 2024 tax year, aimed to give US taxpayers relief from rising inflation.