Are per diem payments without expense reports considered taxable income?

Thanks for the explanation! I'm in a similar situation but my per diem shows up separate on my paystub as "non-taxable earnings." If what you're saying is correct, is my company doing this wrong? Should I be worried?

The key is whether your per diem arrangement meets the accountable plan rules. If your company doesn't require any documentation and you don't have to return unused amounts, then yes, the company is likely classifying these incorrectly as non-taxable. Some companies unfortunately misclassify these payments to make the compensation package seem more attractive, but this can create tax problems for employees later. I'd recommend speaking with your payroll department to understand how they're handling the reporting of these payments on your W-2. If they're not including them in your taxable wages, you might want to consult with a tax professional about your specific situation.

Did you end up owing a bunch of taxes because of this? I'm worried about getting hit with a massive bill next April because my company does the same thing.

How does this tool work? Do you just upload your tax documents and it tells you what's wrong? Sounds too simple to be actually helpful with complex tax situations.

I did end up owing additional taxes, but it wasn't as bad as I feared. I had to pay taxes on about $12,000 in per diem that should have been classified as wages. The good news was that catching it before filing saved me from potential penalties for underreporting. The tool is surprisingly straightforward. You upload your tax documents like W-2s, 1099s, paystubs, etc., and their AI analyzes them for issues and inconsistencies. It's not just a simple check - it actually compares your situation against relevant tax rules. For my per diem issue, it cited specific IRS publications and explained exactly why my company's handling didn't meet accountable plan requirements.

Wait, how does this actually work? I've spent hours trying to reach the IRS about a different issue. Does it really get you through to an actual IRS person?

Sounds like a scam. There's no way to "skip the line" with government agencies. They probably just connect you to some call center pretending to be the IRS. Did you verify you were actually talking to a real IRS agent?

It's basically a service that navigates the IRS phone tree and waits on hold for you. When they reach an actual IRS agent, they call you and connect you directly to that agent. You're not skipping any lines - they're just handling the waiting part. Yes, it was definitely a real IRS agent. They verified my identity using the standard IRS verification process and accessed my tax records. The agent was able to pull up my previous tax returns and provide specific guidance on my situation. No third-party call center would have access to that information.

Your company is absolutely handling this correctly. Since they don't require substantiation (receipts and documentation) of your actual expenses, the "travel allowance" must be treated as taxable wages. By withholding taxes, they're protecting both you and themselves from IRS issues. This is actually better for you in the long run - you're not going to get a surprise tax bill, and you're not at risk of an audit flag for unreported income. Plus, you have the convenience of not having to track and submit every receipt while traveling.

Thanks for confirming! I guess I should be grateful they're doing things by the book instead of complaining about the taxes. The convenience of not tracking every little expense is actually a big plus - I hated having to save every coffee receipt at my last job. One more question - if they switched to requiring expense reports with receipts, would that portion become non-taxable then? Or is there more to it than just collecting receipts?

Yes, if your company established a proper accountable plan requiring documentation, the per diem could become non-taxable. They would need to implement all three requirements: business connection, adequate accounting (receipts/documentation), and return of excess amounts. There's actually another option many companies use called the "federal per diem rate" system. Under this system, companies can pay up to the federal per diem rate for your location without requiring receipts, and it remains non-taxable. They only need documentation of your business purpose, dates, and locations. The rates vary by city but are published by the GSA. This might be something worth mentioning to your employer as a more tax-efficient approach.

You should file amended returns (Form 1040-X) for the years where income was misclassified. It's much better to correct this voluntarily than to have the IRS discover it in an audit. If you amend voluntarily, you'll typically just owe the tax plus interest. If they find it in an audit, you could face additional penalties.

Ugh, that's what I was afraid of. Thanks for the straight answer though. Any idea how much interest they typically charge? I'm looking at probably around $8,000 in unreported per diem payments each year.

The IRS interest rate changes quarterly, but it's currently around 7-8% annually. On $8,000 per year, you're looking at roughly $560-640 in interest per year if you're amending returns from 2 years ago. It's definitely not cheap, but it's still much better than facing potential penalties for underreporting income. I'd recommend getting professional help with the amended returns to make sure everything is calculated correctly. A tax pro can also help you determine if you have any deductions related to your travel expenses that might offset some of the additional tax liability.

You're absolutely right to be proactive about this! I just went through a similar situation with my landscaping company. We had about 15 employees all receiving undocumented "travel pay" that wasn't being taxed properly. When I brought it to management's attention, they were actually grateful because they had no idea they were potentially exposing the company to payroll tax issues too. It turned out our payroll company had been handling it wrong for years. We ended up switching to the federal per diem rate system that someone mentioned earlier - now we get proper reimbursements up to the GSA rates without the tax headaches. One tip: when you talk to HR, frame it as protecting both employees and the company rather than pointing out what they're doing wrong. Most employers want to comply with tax laws, they just don't always know the rules around per diem payments. Good luck getting it sorted out!

From my experience, you're absolutely right about smaller companies being more likely to handle per diem incorrectly. I work for a mid-sized electrical contractor and we had the exact same issue until about two years ago when our accountant caught it during a payroll audit. Smaller companies often rely on basic payroll services or handle payroll in-house without specialized tax knowledge. They hear "per diem" and assume it's always non-taxable, not realizing the accountable plan requirements. Larger corporations typically have dedicated payroll specialists and HR departments that stay current on tax regulations. The good news is that most small business owners genuinely want to do things correctly once they understand the rules. When we brought it to our owner's attention, he was actually relieved to learn the proper way to handle it. Now we use a simplified accountable plan where we just need to submit a basic travel log with dates and locations - no individual receipts required as long as we stay under the federal per diem rates. Definitely get clarity on your situation before approaching your office manager. Having specific information about how to fix it (rather than just pointing out the problem) will make the conversation much more productive!

Thank you so much for adding the tax preparer perspective! The point about missing Social Security and Medicare credits is something I hadn't considered. I'm realizing my situation might be even more complicated than I initially thought. I've been receiving $150/day in "non-taxable" per diem for about 18 months now, which means I'm potentially looking at around $27,000 in income that should have had payroll taxes withheld. This could affect my Social Security earnings record too, right? Also, you mentioned the standard federal per diem rate is $166/day for 2024. Since my company pays $150, would switching to the federal system potentially allow them to keep paying the same amount but make it legitimately tax-free? That seems like it could be a win-win solution when I talk to our HR department. I'm definitely going to look into those amended returns, but it's reassuring to know the IRS prefers voluntary corrections. Do you have any advice on whether it's better to handle the amendments myself or work with a tax professional given the complexity with payroll taxes?

Yes, you're absolutely right about the Social Security credits issue. When per diem is incorrectly classified as non-taxable, those earnings don't get reported to Social Security, which could affect your future benefits calculation. With $27,000 in unreported wages over 18 months, this is definitely significant. Regarding the federal per diem rates - yes, if your company switched to the federal system and you're traveling to standard-cost locations, your $150/day would likely qualify as legitimately tax-free per diem. They'd just need to implement proper documentation (business purpose, dates, locations) and ensure you return any unused amounts if they advance money. For amended returns involving payroll tax issues, I'd strongly recommend working with a tax professional. The complexity increases significantly when you're dealing with both income tax corrections AND missing payroll tax withholdings. A pro can help coordinate with your employer to properly report the additional wages and ensure all the Social Security Administration reporting gets corrected too. The good news is that since you're being proactive about this, you have options to resolve it properly. Most employers are willing to work with employees on these corrections, especially when it helps them get compliant with payroll tax regulations.