To simplify recordkeeping for employee travel expense reimbursements, many employers choose the per diem method. It allows the employer to pay the employee a per diem rate based on the travel locality, rather than require the employee to substantiate all expenses with receipts and then reimburse those actual expenses.

As long as the per diem rate doesn’t exceed the rate allowed by the IRS — and the travel qualifies as a business expense — the employer can deduct the per diem paid. In addition, the payment isn’t considered taxable income to the employee.

The per diem rates include amounts for lodging as well as for meals and incidental expenses. Notably, airfare and other transportation costs aren’t included and must be substantiated by receipts.

The per diem rates come from the General Services Administration (GSA) and were recently updated for 2015. Subsequently, the IRS issued guidance updating the per diem rates for high- and low-cost localities for purposes of the high-low substantiation method. This method makes travel expense reimbursement even simpler because it includes just two per diem rates, one for high-cost localities and another for low-cost localities.

The IRS guidance also updated the list of high-cost metro areas and the months when certain metro areas will be included on the high-cost list. It also revised the definition of “incidental travel expenses” to be consistent with Federal Travel Regulations.

The new per diem rates and high-low method lists went into effect Oct. 1, 2014. During the transition phase, October through December, you can choose either the updated or prior year’s rates but you can’t switch back and forth between the two years’ rates. Also, if you’ve been using the high-low method, you can’t start using locality-specific per diem rates until Jan. 1, 2015.

Keep in mind that travel expenses are frequently scrutinized by the IRS. So it’s critical that you properly follow all the rules for whichever reimbursement method you choose. Please contact us to learn more about your reimbursement options or for help assessing whether your reimbursement policies are in compliance with IRS regs.