Reimbursements and Per Diem on a Pay Stub: The Untaxed Line
A reimbursement raises net pay without touching gross wages or a single tax line. How to put expense reimbursements and per diem on a pay stub correctly.
A reimbursement is money paid back, not money earned. That one distinction decides everything about how expense reimbursements and per diem appear on a pay stub. They raise net pay and leave the rest of the stub alone: gross wages, taxable wages, FICA, federal and state withholding, and the year-to-date columns that feed the W-2 all stay exactly where they were.
Get it wrong and the arithmetic never complains. A stub that folds a $600 travel reimbursement into gross earnings still adds up perfectly. It just withholds tax on money the employee already spent, reports an inflated wage figure to lenders and the IRS, and quietly poisons the year-end totals. Nothing on the page looks broken.
The rest of this article covers where each piece belongs, what makes it taxable, and how to read a stub that carries both.
This article is general information, not legal or tax advice. Per diem and mileage rates change on a federal fiscal-year cycle, and state rules vary. Confirm current figures with the IRS and GSA, or ask a CPA, before you set payroll policy.
Why a reimbursement doesn’t belong in gross pay
Gross pay is compensation for services. It’s what the employee earned by working.
A reimbursement is something else entirely. The employee fronted money for an expense that was really the employer’s, and the employer paid it back. Nothing was earned. No value transferred to the employee beyond making them whole for cash they’d already laid out.
Put that payment in gross and you start a chain reaction that runs all the way to January:
- Gross wages are overstated on the stub.
- Taxable wages inherit the error.
- Social Security withholds 6.2% and Medicare 1.45% on money that isn’t wages, and the employer matches both.
- Federal and state income tax withholding come out too high.
- The year-to-date columns carry the inflation forward through every remaining period.
- W-2 Boxes 1, 3, and 5 are wrong, which means a W-2c to correct them and a 941-X to recover the payroll tax.
The employee notices first, usually as a smaller check than they expected. The employer notices in January, when nothing reconciles.
There’s a second consequence that payroll blogs almost never mention. Under 29 CFR §778.217, bona fide expense reimbursements are excluded from the FLSA regular rate, as long as the amount reasonably approximates the expense incurred. Fold a reimbursement into gross earnings and you’ve also inflated the regular rate, which inflates the overtime premium on every overtime hour in that week. The stub is now wrong in two directions at once.
Where it does belong: a separate, clearly labeled line that flows to net pay and skips the tax math. In Payslip44 that’s an Adjustment, a free-form labeled line with a currency amount, as opposed to an Earning, which carries hours, rate, a YTD figure, and a taxable flag. What keeps the line non-taxable is that structure, not the words you type into the label.
The accountable plan test: three conditions, no partial credit
Calling a payment a reimbursement does nothing. What determines the tax treatment is whether the arrangement qualifies as an accountable plan under Treas. Reg. §1.62-2.
Three conditions, all required:
Business connection. The expense has to be one the employee incurred in performing services for the employer. A hotel room on a client trip qualifies. A gym membership doesn’t.
Adequate accounting. The employee substantiates the expense to the employer within a reasonable period: amount, time, place, and business purpose. Receipts for most things, and for per diem, an expense report covering the time, place, and purpose of the travel.
Return of excess. Anything advanced beyond the substantiated expense comes back to the employer.
IRS Publication 463 gives a fixed-date safe harbor for “reasonable period,” and it’s worth writing into your policy because it removes the argument: advance no more than 30 days before the expense, substantiate within 60 days after it, return any excess within 120 days.
Fail any single condition and the whole arrangement is non-accountable, and there’s no partial credit for the conditions you did meet. The entire payment becomes wages, subject to income tax withholding and both halves of FICA, and it lands in Boxes 1, 3, and 5 of the W-2 like any other paycheck. There is no “but we labeled it a reimbursement” defense.
The practical version of this rule: the test governs the payment, not the paperwork. If you can’t produce substantiation when someone asks for it two years later, that line was wages all along and the stub said otherwise.
Per diem: inside the federal rate, and the taxable excess
Per diem is a flat daily allowance paid instead of collecting receipts. Pay at or below the federal rate and the amount is treated as substantiated by definition. That’s the whole appeal: nobody has to go digging through a shoebox of receipts six weeks after the trip.
The rates for federal fiscal year 2026, in effect October 1, 2025 through September 30, 2026:
| Method | Rate |
|---|---|
| GSA standard CONUS | $178/day ($110 lodging + $68 meals and incidentals) |
| GSA locality rates | Supersede the standard rate; look up the destination |
| IRS high-low, high-cost locality | $319/day ($86 M&IE) |
| IRS high-low, all other CONUS | $225/day ($74 M&IE) |
| Incidental expenses only | $5/day |
| Transportation industry special M&IE | $80 CONUS / $86 outside CONUS |
The GSA figures come from the FY2026 CONUS rate release, unchanged from FY2025. The high-low numbers are from IRS Notice 2025-54.
Now the split rule, which is the part that produces two lines on a stub instead of one.
At or below the applicable federal rate, with adequate accounting for time, place, and business purpose: non-taxable. No receipts required. It doesn’t enter gross.
Above the federal rate: the excess is wages, taxable and withheld upon like anything else on the earnings side. And under Treas. Reg. §1.62-2(h)(2)(i)(B), the excess is subject to withholding in the payroll period in which the employer pays the reimbursement, not the period the travel happened. If someone traveled in February and the true-up hits the April 15 check, it’s April wages.
Two situations make per diem fully taxable no matter how modest the amount. First, per diem paid with no expense report at all, under a non-accountable plan. Second, per diem paid to someone who wasn’t traveling away from home overnight, which fails the business-connection test for travel expenses regardless of how the payment is structured.
One scheduling note. GSA republishes rates every October 1, and the IRS notice that sets the high-low figures normally lands in September. A stub written in September 2026 and one written in October 2026 may sit under different ceilings for the same trip pattern. Check GSA before October rather than after.
Putting it on the stub: a worked example
The rules are easy enough to state and much harder to picture, so here is an actual stub, read line by line.
An employee earns $30/hour, worked 80 hours in the period, traveled 5 days to a location where the federal M&IE rate is $68, received $80/day in per diem, and drove 120 business miles in August 2026.
| Line | Amount | Taxable? | Enters gross? |
|---|---|---|---|
| Regular earnings, 80 hrs @ $30.00 | $2,400.00 | Yes | Yes |
| Per diem, 5 days @ $68.00 (at federal rate) | $340.00 | No | No |
| Per diem excess, 5 days @ $12.00 over rate | $60.00 | Yes | Yes |
| Mileage, 120 mi @ $0.76 | $91.20 | No | No |
| Gross wages | $2,460.00 | ||
| Federal, state, Social Security, Medicare | computed on $2,460.00 | ||
| Non-taxable adjustments | +$431.20 |
Gross wages are $2,400.00 plus the $60.00 excess. All withholding is calculated on $2,460.00, and nothing else. The $431.20 of reimbursement sits below the tax math and is added straight to the check.
If withholding on $2,460.00 came to $483.39 (7.65% FICA plus federal and state income tax), net wages are $1,976.61 and the actual payment is $2,407.81. The employee is paid more than their net wages. That is correct, and it’s the thing that looks wrong to anyone reading a stub for the first time.
Four things this example is doing on purpose:
Two per-diem lines, not one. The $340 at the federal rate is an Adjustment. The $60 excess is an Earning with the taxable flag on. Splitting a partially-excess per diem across two lines is the most useful habit in this whole article, and it’s the step most people skip.
Mileage at the right rate. 2026 has two business standard mileage rates: 72.5 cents per mile from January 1 through June 30, and 76 cents from July 1 through December 31, per the IRS standard mileage rates page. An August trip uses 76 cents. Pay above the standard rate and the excess is wages, same rule as per diem.
Labels in plain English. “Travel per diem, Denver, Mar 3-7” is a label. “PD ADJ” is a mystery that a lender or an auditor will resolve in whichever direction is worst for you. Vague labels are how non-taxable lines get re-read as wages.
No YTD in the taxable-wage column. The reimbursement lines don’t roll into YTD gross. Keep a separate running reimbursement total if the employee will need it for their own records, but it must not touch the wage column that feeds the W-2. This is one of the most common pay stub errors in hand-built payroll.
State law reinforces the separation. California Labor Code §2802 requires employers to indemnify employees for necessary business expenditures, and §226 requires an itemized wage statement. Wage-statement claims have been brought where a stub gave the employee no way to tell wages from reimbursement. In California that separate line is doing compliance work. See pay stub requirements by state for how far this varies.
Cent-level accuracy matters more here than in ordinary payroll, because the reimbursement total has to reconcile against an expense report that someone else assembled. Payslip44 runs decimal arithmetic throughout rather than floating point, so $431.20 stays $431.20 instead of drifting to $431.1999999 in a total three columns later.
Where each piece lands on the W-2
January is when a mislabeled line stops being invisible. The General Instructions for Forms W-2 and W-3 split it cleanly.
Non-taxable, substantiated amounts paid at or below the federal per diem or mileage rate under an accountable plan: not in Box 1, not in Box 3, not in Box 5. When the employer uses a per diem or standard mileage allowance, the substantiated amount is reported in Box 12, Code L.
Worth reading twice, because plenty of forum answers state it backwards. Code L reports the amount treated as substantiated, meaning the non-taxable portion, and never the excess.
Taxable excess and any payment under a non-accountable plan: Boxes 1, 3, and 5 as wages, with the withholding in Boxes 2, 4, and 6. If you treat the excess as supplemental wages, the flat federal withholding rate is 22% up to $1,000,000 of supplemental wages for the year.
The reconciliation test takes about a minute. Pull the last stub of the year. YTD taxable gross should equal Box 1 plus any pre-tax deferrals. YTD reimbursements should equal Box 12 Code L, or nothing at all. If those don’t line up, a stub somewhere mislabeled a line, and the fix belongs in how to correct a pay stub rather than in a note to the employee.
One consequence worth telling employees plainly. Non-taxable per diem generally will not help you qualify for a mortgage or a lease. Underwriters count qualifying income from taxable wages, so a stub showing $4,000 gross and $900 in per diem is a $4,000 stub to a lender. Travel nurses and long-haul drivers, whose pay packages lean heavily on per diem, run into this constantly. Taxable per diem can sometimes count with a two-year history and a continuance letter, but the non-taxable half is invisible to underwriting. Same principle applies when submitting stubs for a rental application.
Contractors, owners, and reimbursing yourself
Not everyone building a stub is a W-2 employer, so two short scope notes.
1099 contractors. An accountable-plan reimbursement paid to a contractor is excluded from Form 1099-NEC Box 1. A lump payment with no substantiation goes in Box 1 and becomes the contractor’s gross income, which they then have to deduct against. If you’re a contractor building your own 1099 pay stub for income verification, keep the reimbursement line out of the income figure. Otherwise your stub claims income your 1099 won’t back up.
Owners and the self-employed. There’s no reimbursing yourself into a non-taxable stub line if you’re a sole proprietor. You deduct the expense directly on Schedule C, and it never appears on a pay stub because you don’t issue yourself wages. S-corp owner-employees are a different case: they’re employees, and they can be reimbursed under a properly documented accountable plan like anyone else.
The short version
A reimbursement raises net pay and nothing else. Gross stays where it was, the tax lines stay where they were, and the YTD wage column never sees it.
Per diem is two numbers wearing one name. The part at or below the federal rate is a non-taxable line. The part above it is an earning, taxed like any other, in the period it’s paid.
Payslip44 keeps those on opposite sides of the app on purpose: Earnings carry hours, rate, YTD, and a taxable flag, while Adjustments are labeled lines that hit net and stop there. Decimal money math keeps the totals reconciling to the cent, and CSV export hands your bookkeeper the split already broken out instead of a PDF they have to re-key. Download it and put the per diem where it belongs.
Frequently Asked Questions
Do expense reimbursements count as income on a pay stub?
No. A reimbursement pays an employee back for a business expense, so it isn't compensation for services. Under an accountable plan it stays out of gross wages, out of taxable wages, and out of every tax line. Only the payment total changes, not the earnings.
Is per diem taxable?
Not if it's paid at or below the applicable federal per diem rate under an accountable plan and the employee accounts for the time, place, and business purpose of the travel. Anything above the federal rate is taxable wages, and if there's no accountable plan at all, the entire payment is wages.
Where does a mileage reimbursement go on a pay stub?
On its own non-taxable line, separate from earnings. In Payslip44 that's an Adjustment rather than an Earning. At or below the IRS standard rate it doesn't enter gross pay. For 2026 that rate is 72.5 cents per mile through June 30 and 76 cents per mile from July 1, and anything paid above the rate is taxable wages.
Does a reimbursement increase gross pay?
No. It increases net pay, the amount actually paid out, without increasing gross wages. That's why a stub can show $2,400 gross and pay out more than the after-tax figure implies. Adding a reimbursement into gross is the most common way a hand-built stub over-withholds and inflates its own year-end totals.
What is an accountable plan?
An IRS-defined reimbursement arrangement that meets three conditions: the expense has a business connection, the employee substantiates it within a reasonable period (60 days under the fixed-date safe harbor), and any excess advance is returned (within 120 days). Fail any one and the arrangement is non-accountable, which makes every payment under it taxable wages.
How is per diem reported on a W-2?
The portion treated as substantiated, meaning per diem paid at or below the federal rate under an accountable plan, is reported in Box 12 with Code L and is not included in wages. Any excess is added to Boxes 1, 3, and 5 as taxable wages, with the corresponding withholding shown in Boxes 2, 4, and 6.
Does per diem count as income for a mortgage or an apartment application?
Usually not. Underwriters qualify borrowers on taxable income, so non-taxable per diem that never reaches Box 1 of the W-2 typically doesn't count. Taxable per diem can sometimes count with a two-year history and an employer letter confirming it will continue.
What is the per diem rate for 2026?
For federal fiscal year 2026 (October 1, 2025 through September 30, 2026) the standard CONUS rate is $178 per day, made up of $110 lodging plus $68 meals and incidentals, with higher rates for specific localities. Employers using the IRS high-low method may instead use $319 per day for high-cost localities and $225 elsewhere. GSA republishes the rates every October 1.