Per Diem

Per diem (Latin for "per day") is a daily rate paid to cover living expenses when you're working away from your tax home. Instead of tracking every receipt for hotels, meals, and tips, per diem gives you a flat daily amount. The IRS publishes standard per diem rates for every city in the country — rates vary based on the cost of living in each location.

For contractors, per diem typically comes into play on out-of-town projects. If you're a contractor based in Denver but working on a six-month project in San Francisco, you'd receive per diem to cover the higher cost of living there. Per diem rates have two components: lodging and M&IE (meals and incidental expenses). For 2024, rates range from $107/day in lower-cost areas to $400+/day in expensive cities like New York and San Francisco.

The tax treatment of per diem depends on whether you're self-employed or receiving it from a client. If a client pays you per diem and you're accountable for the expenses (you return any excess), it's not taxable income. If you're self-employed and paying your own travel expenses, you can deduct actual expenses or use the per diem rate as a simplified calculation method for meals (but you must use actual costs for lodging).

Per diem can make or break the profitability of out-of-town work. If you bid a project without accounting for travel costs — or accept per diem rates that don't cover actual expenses in an expensive city — you're eating the difference out of your profits. Conversely, if per diem rates exceed your actual spending, the excess is income you should be aware of for tax purposes.

When bidding out-of-town projects, always research the GSA per diem rates for that location and build appropriate travel costs into your proposal.