Per Diem and Travel Pay on Out-of-Town Jobs

Why this matters

An out-of-town job raises two money questions that feel like one: is the per diem tax-free, and is the drive paid? They are answered by two different bodies of law, and a shop can get one right and the other wrong in the same week. The common miss is a shop that pays a generous per diem, treats it all as tax-free, and pays only for hours on site. The tech ends up with a stack of unpaid drive hours, an overtime week that was never counted as one, and possibly per diem the IRS would call wages. Knowing both sets of rules lets you check the trip before you leave, not after the check lands.

This is general information on the federal rules and a few state layers, not tax or legal advice.

Question one: is the per diem wages or a tax-free reimbursement?

Money your employer gives you for travel costs is tax-free only if it is paid under an accountable plan, a reimbursement arrangement that meets three tests in Treasury Regulation 1.62-2:

1. Business connection. It pays for costs you incur doing the employer's work away from home. Money that would be paid whether you traveled or not fails this test, and so does a "per diem" that replaces part of your normal wage (the regulation calls this wage recharacterization).
2. Substantiation. You account for the trip within a reasonable time. The IRS safe harbor is within 60 days of the expense.
3. Return of excess. You give back any advance you did not use within a reasonable time, with a safe harbor of 120 days. Under the alternative periodic-statement method, the employer sends a statement at least quarterly and you return the excess within 120 days of it.

If the plan fails any test, the payments become wages: they go in box 1 of your W-2 and get income tax, Social Security and Medicare withheld like any other pay.

A per diem saves you the receipts for the amount, not for the trip. Under the IRS per diem rules (the current-year revenue procedure, explained in IRS Publication 463), a per diem paid at or below the federal rate for the locality is treated as substantiated for its amount. Those are the rates the General Services Administration publishes for each city and county, split into lodging and M&IE (meals and incidental expenses). You still have to substantiate time, place and business purpose: which days, where, and for what job. A shop can pay M&IE only and book the hotel itself, or pay a combined lodging-plus-M&IE rate. Many shops also use the simpler high-low method the IRS publishes each year, with one rate for designated high-cost areas and one for everywhere else.

For partial travel days, the IRS lets employers prorate using any reasonable method applied consistently; the common one is 75 percent of the daily M&IE rate on the day you leave and the day you come back.

Paying above the federal rate is legal, but the excess is wages unless you return it. The amount up to the federal rate stays tax-free and is reported in W-2 box 12 with code L; the excess goes into box 1.

The overnight rule and the one-year rule

Two gates decide whether any of this is tax-free in the first place.

• You must be away overnight. The IRS sleep-or-rest rule says travel is "away from home" only when the trip is long enough that you need sleep or rest to do the work. A day trip to a job two hours away does not qualify, so a meal allowance paid on that day is wages even under an otherwise accountable plan.
• The assignment must be temporary. Under the Internal Revenue Code (section 162(a)), an assignment realistically expected to last, and actually lasting, one year or less is temporary. One expected to last more than a year is indefinite: your tax home moves to the job, and per diem becomes taxable from day one. If an assignment expected to run eight months turns into a two-year project, it becomes indefinite from the date the expectation changed.

That second rule matters for long commercial projects, storm-recovery work and extended shutdowns.

Question two: is the travel time paid?

The FLSA rules on travel are in 29 CFR 785.33 to 785.41, and they turn on what kind of trip it is.

• Ordinary commute: not hours worked.
• A one-day trip to another city: the travel counts as work, minus the time you would normally spend commuting (785.37).
• Overnight travel: counts as work when it falls during your normal working hours, including the same hours on a Saturday or Sunday (785.39). Riding as a passenger outside those hours does not count federally. Sleeping at the hotel and your evening off do not count either.
• Driving the work vehicle, or riding in it as a required helper: counts as work whenever it happens (785.41). The passenger exception is for someone traveling as a passenger, such as a tech flown out on an airline, not for the crew in the truck.
• Any work done while traveling: counts, including taking calls or doing paperwork for the job.

State law often counts more. California generally treats time spent traveling at the employer's direction as hours worked, passenger time included. Check your own state's labor department before assuming the federal passenger rule applies to you.

Question three: does the per diem touch your overtime rate?

Overtime is figured on your regular rate. A reimbursement that reasonably approximates the trip's actual costs is excluded from the regular rate (29 CFR 778.217). A per diem that materially exceeds what the trip costs, or one paid per hour worked, is pay, and the DOL puts the excess (or all of it, if it is really hourly pay) into the regular rate. That raises your overtime premium for the week. For how the regular rate is built, see related: Reading Your Pay Stub as a Technician.

A worked trip, filled in

A commercial rooftop unit replacement, 240 miles from the shop. The tech's normal hours are 7:30 to 4:00, Monday to Friday, at an hourly base rate written R. The shop books and pays the hotel directly and pays a flat M&IE per diem. Write the federal M&IE rate for that locality as D. The shop pays 1.2 D per day, and its written policy allows the full rate on travel days, which is a consistent method the IRS permits. The tech drives the company truck; a helper rides along as part of the crew.

TRIP LOG   RTU swap, 240 mi, 3 nights, truck 14
DAY  WORK          DRIVE        HRS   NIGHT
MON  10:00-18:00   05:30-10:00  12.0  hotel
TUE  07:00-18:00   -            10.5  hotel
WED  07:00-18:00   -            10.5  hotel
THU  07:00-13:00   13:30-18:00  10.5  home
lunch 0.5 hr relieved daily, deducted
per diem paid: 4 days x 1.2 D = 4.8 D
purpose: replace RTU-2, job 4417

Hours, checked line by line. Monday: 4.5 hours of required driving plus 10:00 to 6:00 on site minus a 30-minute lunch (7.5 hours), for 12.0. Tuesday and Wednesday: 7:00 to 6:00 minus lunch, 10.5 each. Thursday: 6.0 hours on site plus 4.5 hours of driving home (the 30-minute lunch from 1:00 to 1:30 is unpaid), for 10.5. The week totals 12.0 plus 10.5 plus 10.5 plus 10.5, which is 43.5 hours, so 3.5 overtime hours are owed even with Friday off.

The version that shorts the tech. If the shop paid only on-site time, it would drop Monday's and Thursday's driving, 4.5 plus 4.5, or 9.0 hours. Paid hours would fall to 43.5 minus 9.0, which is 34.5, with no overtime at all. The difference in pay is 9.0 hours, of which 3.5 should have been at 1.5 R.

The helper, and the tech who flew. The helper is required to ride along as part of the crew, so under 785.41 the helper is working while riding and logs the same 43.5 hours as the driver. Compare a third tech the shop flies in to commission the unit, on an airline flight Sunday from 6:00 to 9:30 in the evening. That is passenger travel outside the corresponding normal hours (7:30 to 4:00) on a nonworking day, so federally none of those 3.5 hours count. Had the same flight left Sunday at 1:00 in the afternoon, the part from 1:00 to 4:00 would count, because it falls within the tech's normal hours even on a Sunday. In California, all of it would count.

Per diem, checked against the gates. Overnight: yes, three nights. Temporary: yes, four days. Substantiation: the log gives dates, the place and the business purpose (the job number), which is everything the federal-rate rule still requires. Amount: the shop paid 4.8 D against a federal allowance of 4 days times D, or 4.0 D. The excess is 0.8 D. Under an accountable plan, the tech either returns 0.8 D within the safe-harbor window or the shop reports it as wages in box 1, with 4.0 D in box 12 code L. Most shops simply include it in wages, which is legitimate as long as they actually do it.

The regular-rate check. An excess of 0.2 D a day over the federal rate is the kind of amount payroll has to judge against what the trip really cost. If the trip's real meal costs came close to 1.2 D a day, it reasonably approximates cost and stays out of the regular rate. If the shop paid the same per diem whether or not anyone traveled, it is pay and belongs in the overtime math.

What changes the answer. If this job were a two-hour drive and the crew drove home each night, there is no overnight travel: the per diem would be wages, and the travel time would be judged under the one-day rule each day (counting, minus the normal commute). If the project were expected to last 14 months, the per diem would be taxable from the first day. And if the tech drove their own truck, the shop would reimburse mileage instead, tax-free under an accountable plan at up to the IRS standard mileage rate, which is indexed each year.

The paperwork to keep for every trip

• A same-day log of departures, arrivals, work hours, driving hours, lunches and where you slept. Your stub cannot be checked without it; see related: Tracking Your Own Hours and Pay.
• The job and its purpose, the piece the per diem rules still require from you.
• Receipts for anything reimbursed at actual cost (lodging you booked yourself, materials, tolls).
• The shop's written travel policy: per diem rate, how partial days are handled, whether the excess is wages, and who books lodging.
• The pay stub for that week, compared against your log: hours, overtime, and whether per diem appears as wages or reimbursement.

If the shop's policy is that drive time is unpaid, or per diem is paid instead of an hourly wage you would otherwise get, take this log and the policy to your state labor department or an employment attorney before the next trip, not after the third one.

References

• Treasury Regulation 1.62-2 (accountable plans; wage recharacterization)
• IRS Publication 463 (travel away from home, per diem substantiation) and the current IRS revenue procedure on per diem rates; GSA per diem rate tables
• Internal Revenue Code section 162(a) (one-year rule for temporary assignments)
• 29 CFR 785.33 to 785.41 (travel time) and 29 CFR 778.217 (reimbursements and the regular rate)
• See related: Reading Your Pay Stub as a Technician, Tracking Your Own Hours and Pay, Overtime Rights a Tech Should Know