Understanding Per Diem Rates for Business Travel: What You Need to Know

Your expense report gets approved or rejected based on per diem rates. If you book your own business travel at a small or midsize company, you need to know what your company will reimburse before you reserve anything, not after you submit receipts.

This guide breaks down per diem rates, explains how the IRS High-Low method works, and shows you how to calculate compliant rates. Understanding federal rates protects your wallet and keeps your reimbursements tax-free.

What are Per Diem Rates?

Per diem is essentially a daily travel allowance. You get a fixed amount to cover lodging, meals, and incidentals instead of having to track every purchase.

Per diem eliminates two headaches for business travelers. First, you skip documenting every meal and taxi ride. Second, when your company follows federal guidelines, these payments stay tax-free. The IRS treats them as business reimbursements, not taxable wages.

Finance sets a location-based rate, and you manage spending within that limit. Come in under budget? You typically keep the difference. Go over? You cover the overage unless you prove the extra expense was necessary.

The Average Per Diem in the US

Averages mean nothing without a zip code. A Manhattan hotel doesn’t cost the same as a hotel in Des Moines. The General Services Administration surveys hotel invoices and meal prices, then publishes daily allowances for about 300 major cities and surrounding counties. These GSA rates set the maximum non-taxable amounts the IRS recognizes.

The High-Low Method Simplifies Rate Tracking

Many small and midsize companies skip city-by-city lookups. They use the IRS high-low method instead. It collapses hundreds of GSA figures into two rates. 

As of October, 2024:

• High-cost localities receive $319 per day: $233 for lodging, $86 for meals and incidentals. High-cost means any place where the federal per diem reaches at least $261.
• All other locations receive $225 per day: $151 for lodging, $74 for meals and incidentals.

Book a trip to San Francisco, Seattle, or New York? You work with $319. Book Milwaukee or Nashville? It's $225. No spreadsheets, no county lookups, no finance debates. That simplicity explains why most companies without travel departments choose high-low.

You should know that the high-cost list changes annually, so check current tables before booking.

What to Do When Federal Rates Don't Match Real Costs

Those numbers satisfy the IRS, but they don't always cover your actual hotel bill. Corporate booking data shows real costs often exceed federal caps during conferences or peak seasons. When your hotel search returns $350 rooms and the federal cap sits at $233, the gap becomes your problem.

You can book above federal limits, but anything over $233 counts as taxable income unless your company handles the excess separately. Flag this gap with finance before you book. Bring screenshots showing actual rates in your market and push for a policy exception before the trip, not after you've already paid.

Per Diem for International Travel 

GSA numbers stop at the border. For London, Tokyo, or any destination outside the continental U.S., you’ll need to use the Department of State per diem tables. They work the same way with daily caps for lodging and meals. 

However, you should know that these rates update monthly to reflect currency swings and local inflation. Check the State Department database before finalizing your budget since exchange rates can shift between booking and travel.

How to Calculate Your Daily Allowance 

Your allowance splits into two buckets: lodging and meals & incidentals (M&IE). Get that split wrong or miscalculate partial days, and your expense report bounces back.

Lodging Versus Meals and Incidentals

Lodging covers your hotel bill. M&IE covers everything else you spend during the day. Federal tables list each amount separately because the IRS taxes them differently.

Keep in mind that hotel taxes usually sit outside base rates. The hotel might charge $27 in state tax. Your company may reimburse that separately, or expect you to fit the tax into the $233 lodging cap. Ask before booking. Knowing whether you work with pre-tax or post-tax dollars lets you pick a hotel that fits the actual budget.

The 75% Rule for Travel Days

Here's where most travelers trip up. You can't claim a full day's allowance when you only traveled half the day. The IRS sets partial travel days at 75% of the M&IE portion.

For a $319 high-cost per diem:

• Arrival day: $64.50 (75% of $86 M&IE) plus $233 lodging
• Full days: $319
• Departure day: $64.50 (75% of $86 M&IE) plus $233 lodging

Lodging stays at the full nightly amount. You either slept there or you didn't. Skip the 75% reduction and finance flags your claim. Some companies ignore this rule for simplicity, but verify your policy first.

How to Keep Per Diem Reimbursements Tax-Free

Daily allowances only stay off your W-2 when your company runs an IRS-compliant accountable plan. Slip on any required rule and every dollar becomes taxable wages. You lose part of your reimbursement to withholding while your company owes payroll tax.

Three Requirements for Tax-Free Status

• Business connection: Your employer reimburses only work-related expenses. A client visit in Atlanta qualifies. A personal weekend tacked onto that trip does not.
• Adequate substantiation: Show when, where, and why you traveled. A calendar invite or itinerary proves the point. You don't need every coffee receipt when using allowances.
• Return of excess: If the company advances $1,000 and your trip gets cut short, return unused cash within 120 days.

Meet all three and your allowance stays tax-free. Miss one and the IRS can reclassify every payment as income.

What Happens When You Exceed Federal Limits

Your company can pay more than federal rates, but the overage needs proper handling. Suppose you're in New York where high-low caps reimbursement at $319 per day. Finance sets the allowance at $400. The IRS can tax that $81 difference as wages if the company doesn't track it correctly.

Several IRS-approved methods handle higher per diem:

• Treating excess as taxable income
• Requiring receipts for the entire amount
• Reimbursing actual expenses with documentation
• Following accountable plan rules including excess payment returns

Ask your company which method it uses. The answer protects both your wallet and your paycheck.

Pro tip: Otto the agent handles travel policy compliance automatically. When you search for hotels, Otto shows which options fit within your company's per diem limits and flags anything that exceeds policy. You don't need to memorize rates or calculate allowances since Otto applies your company's travel policy to every search, so you see what's compliant before you book.

When Travel Disruptions Break Your Calculations

Your flight gets cancelled at 9 PM. You're rebooking for tomorrow, extending the hotel, and now you need to recalculate per diem. What was a two-day trip at $189 total just became three days. Is Wednesday a travel day at 75% or a full day at 100%? Does the extra hotel night count against lodging limits?

Travel disruptions create a cascade of administrative work. You're managing the rebooking, updating your calendar, notifying your team, and figuring out how the delay affects your expense claim.

Otto the agent can help. Otto doesn't just handle disruptions, it applies your company's complete travel policy to every booking. Whether your company uses per diem limits, requires specific fare classes, or caps hotel costs, Otto flags in-policy vs. out-of-policy options as you search.Free for business travelers, Otto monitors flights starting 24 hours before departure, catches delays and cancellations, and presents alternative options. When your meeting gets pushed and you need to stay an extra night, tell Otto "move my return to Thursday" and it helps you rebook the flight and extend the hotel, both within your travel policy, in one conversation.

Try Otto for your next business trip. When plans change, Otto handles rebooking automatically so it’s one less thing to worry about.