You’re reviewing project costs for a multi-state hospital build when you see it: a per diem line item that adds $180,000 to the budget. Your project manager explains that it covers traveling workers from three states away. You approve it, but questions linger.
What is per diem in construction, exactly? Are you paying the right amount? Is it taxable? And why does it vary so much between projects?
Per diem represents one of construction’s most misunderstood cost categories. Get it wrong, and you’re looking at tax penalties, recruiting disadvantages, or budget overruns. Get it right, and you’ve got a competitive edge in a market where 92% of construction firms report difficulty filling positions.
This guide breaks down everything construction contractors need to know about per diem: what per diem covers, how to calculate rates, tax implications, common mistakes, and the best practices for managing these payments efficiently.
What Is Per Diem in Construction? Understanding the Daily Allowance
Per diem in construction is a daily allowance paid to construction workers who travel away from their primary residence for work. It covers lodging, meals, and incidental expenses incurred while working on a temporary job site – expenses workers wouldn’t face if they were working locally.
Think of the per diem allowance as keeping workers financially whole while they’re on the road. An electrician from Dallas working on a data center project in Phoenix shouldn’t lose money because of hotel bills and restaurant meals. Per diem compensates for that differential.
Per diem is not the same as hourly wages, overtime pay, bonuses, or travel reimbursement. It’s a separate allowance specifically tied to living expenses away from home. Construction companies use per diem heavily because the industry operates on a project-by-project basis, often requiring workers to relocate temporarily to job sites hundreds of miles from home.
Why Do Construction Contractors Offer Per Diem Allowances?
Construction contractors offer per diem for three strategic reasons that directly impact their ability to execute projects successfully.
Recruiting and retaining mobile workers in a tight labor market
With the construction industry needing 439,000 new workers in 2025, per diem has become a competitive differentiator. An electrician choosing between two traveling jobs might pick the one offering $140 per diem over one offering $90 – even if base hourly rates are identical. The extra $50 per day adds up to $1,000 every four weeks, which significantly impacts take-home income.
Simplifying accounting and reducing administrative burden
Per diem eliminates the tedious process of collecting, verifying, and processing individual receipts. Instead of a project engineer reviewing 50 hotel invoices and 150 meal receipts each week, efficient construction time tracking software will automatically calculate per diem based on days worked.
Complying with labor standards and union contracts
Many union agreements specify per diem rates and payment structures. Companies working on union projects must meet these requirements. Even on non-union projects, per diem helps companies stay competitive with union contractors who offer these allowances as standard benefits.
What Travel Expenses Are Covered by Per Diem?
Per diem covers three specific expense categories. Understanding what’s included – and what’s not – prevents confusion and potential tax complications.
What Per Diem Covers
Expense Category | Typical % of Daily Payment | Specific Examples |
Lodging | 60-70% | Hotels, motels, extended stay facilities, RV park fees, workforce housing |
Meals | 25-30% | Restaurant meals, fast food, takeout, food delivery while on assignment |
Incidentals | 5-10% | Tips for hotel staff and servers, laundry and dry cleaning, parking at lodging |
Lodging represents the bulk of per diem because housing costs vary dramatically by location. A hotel room in Phoenix might cost $90 per night, while the same quality room in San Francisco or Las Vegas runs $250. Per diem rates adjust for these geographic differences.
Meals and incidental expenses (M&IE) is the IRS term for the daily food and small expense allowance. This covers any meal purchased while working away from home. The IRS publishes standard M&IE rates that vary by location – high-cost areas get higher M&IE allowances than rural areas.
Incidentals include the small daily expenses that add up when living in hotels: tips for housekeeping staff, tips for food delivery, coin laundry, and parking fees at the hotel.
What Per Diem Does NOT Cover
Transportation costs: Gas, mileage, flights, rental cars, and tolls between home and the job site are separate reimbursements.
Personal entertainment: Movie tickets, golf, recreational activities, and entertainment unrelated to work are not covered by per diem.
Equipment or work supplies: Tools, safety gear, work boots, or other items needed to perform your job are separate from per diem.
Groceries for cooking: If a worker rents an apartment with a kitchen and cooks meals at home, those grocery costs typically don’t qualify under per diem. The IRS expects per diem to cover restaurant meals and similar purchased food.
The distinction matters for tax compliance. When companies pay per diem for expenses outside these categories and call it “per diem,” they risk IRS scrutiny.
Clear definitions prevent problems later – much like how systematic time tracking prevents payroll disputes.
How Federal Per Diem Rates Are Calculated for Construction Workers
Per diem calculations start with federal rates established by the General Services Administration (GSA), then adjust based on company policy, competitive pressure, and project requirements.
GSA Federal Rates: The Baseline
The General Services Administration publishes official per diem rates annually for every location in the United States. For fiscal year 2026 (October 1, 2025 through September 30, 2026), GSA rates remain unchanged from 2025:
Location Type | Lodging | M&IE | Total Daily Rate |
Standard CONUS | $110 | $68 | $178 |
High-cost areas | Varies | $68-$92 | $178-$300+ |
Standard rate applies to most of the country – smaller cities, rural areas, and other locations without unusually high housing costs. The $110 lodging rate assumes workers can find acceptable accommodations for that amount. The $68 M&IE rate assumes typical meals and incidental costs.
High-cost areas rates apply to approximately 300 locations where housing costs significantly exceed the national average. Cities like San Francisco, New York, Boston, Seattle, and Los Angeles have higher lodging rates – sometimes exceeding $250 per night.
Construction contractors can find exact rates using the GSA per diem lookup tool, which allows searches by city, county, or zip code.
How Companies Set Actual Per Diem Rates
GSA rates establish the tax-free ceiling, but employers have discretion in how much they actually pay. Three common approaches:
- Match federal rates exactly. Many companies simply pay the federal rate for each location. This ensures compliance with IRS rules and eliminates any question about whether payments exceed tax-free limits.
- Pay a combined flat rate across all locations. Some construction contractors – especially those working primarily in similar cost regions – pay one standardized daily rate regardless of location.
For example, a Texas-based mechanical contractor might pay $125 per day whether crews work in Houston, Dallas, or Midland. This simplifies payroll but might undercompensate workers in high-cost areas or overcompensate in low-cost regions.
- Pay above GSA rates (with tax consequences). Companies competing aggressively for traveling workers sometimes offer per diem above federal limits – say $200 per day in a $178 location. The excess becomes taxable income for the worker. Some contractors do this deliberately, accepting the tax consequence as the cost of recruiting in tight labor markets. Union contracts often specify exact per diem rates set by collective bargaining. Union contractors pay these contractual amounts, which may differ from federal rates.
Accurate time tracking is important for calculating per diem correctly. Just as a biometric clock in verification ensures you only pay for hours actually worked, systematic per diem management ensures you compensate traveling workers fairly while maintaining tax compliance.
Request a demo to see how automated workforce tracking supports accurate labor cost management.
IRS Rules: Is Per Diem Taxable Income for Construction Employees?
Whether per diem is taxable depends entirely on how it’s structured and whether the arrangement meets specific IRS rules. Get this wrong, and both the company and the worker can face tax issues.
When Per Diem Is Tax-Free
Per diem qualifies as tax-free reimbursement when all three IRS conditions are met:
- The worker maintains a tax home. A tax home is the worker’s regular place of residence and primary work location. If a worker doesn’t maintain a permanent home somewhere, the IRS may classify them as an itinerant worker, which makes per diem taxable. Construction workers who travel constantly but maintain an apartment or house somewhere generally qualify for this requirement.
- The work assignment is temporary (less than one year). The IRS defines “temporary” as an assignment expected to last – and actually lasting – less than 12 months. Once an assignment exceeds one year, the IRS considers it indefinite, and per diem becomes taxable. This trips up contractors on long-duration projects where the same workers stay on site for 18+ months.
- The company operates an accountable plan. An accountable plan requires:
- Per diem payments have a business expense connection (traveling for work)
- Workers substantiate time, place, and business purpose
- Excess reimbursements (above actual expenses incurred) are returned
In practice, “substantiating” usually means submitting a simple expense report showing dates worked, project location, and business purpose – not detailed receipts. This is much lighter documentation than proving actual expenses.
When these conditions are met, per diem doesn’t appear on the worker’s W-2, isn’t subject to income tax, and isn’t subject to Social Security or Medicare taxes. For a worker receiving $140 per diem for 200 days ($28,000 annually), that’s substantial tax savings compared to if that amount were paid as taxable wages.
When Per Diem Becomes Taxable Income
Several scenarios trigger tax liability:
Per diem exceeds federal rates without proper documentation. If a company pays $200 per day in a location where GSA allows $178, the $22 excess is taxable unless the company requires actual expense documentation proving the worker incurred costs justifying the higher payment.
No expense report or business purpose documentation. Even if per diem is below federal limits, it becomes taxable if workers don’t submit reports substantiating the time, place, and business purpose of their travel.
Assignment lasts longer than one year. Once a worker stays on the same project beyond 12 months, the IRS treats the assignment as indefinite. All per diem going forward becomes taxable income. Some contractors address this by rotating workers off projects approaching the one-year mark, though this creates operational challenges.
Worker doesn’t maintain a tax home. True itinerant workers who live permanently on the road without maintaining a primary residence don’t qualify for tax-free per diem. Their per diem payments are taxable.
Payments aren’t structured as reimbursement under an accountable plan. If per diem is included in hourly wages or paid without any business expense connection, it’s taxable compensation.
The 100% Meals Deduction for Companies
Thanks to the Taxpayer Certainty and Disaster Relief Act of 2020, extended through 2025, businesses can deduct 100% of the meals portion of per diem payments – a temporary increase from the usual 50% limit. This enhanced deduction applies when the meal expense meets IRS requirements, including that the food is provided by a restaurant or similar establishment.
For construction contractors paying significant per diem on multiple projects, this temporary rule delivers meaningful tax savings. Companies should work with their tax advisors to ensure they’re capturing this benefit properly. Note that while this enhanced deduction was set to expire, companies should verify their current status with IRS Publication 463 or their tax professionals.
Average Per Diem Rates: What Construction Contractors Pay
While federal rates provide the ceiling, actual per diem payments in construction vary significantly based on geography, project type, and competitive dynamics. Understanding industry benchmarks helps contractors structure competitive packages without overpaying.
Geographic Variation in Per Diem Rates
Location drives per diem more than any other factor. Here are realistic ranges based on construction industry norms for the fiscal year 2026:
Market Type | Locations | Per Diem Range | Why These Rates |
High-Cost Metro Areas | San Francisco, New York, Boston, Los Angeles, Seattle, Washington DC, San Diego, Las Vegas | $150-225/day | Extreme housing costs require premium rates to recruit workers |
Mid-Market Cities | Houston, Dallas, Austin, Denver, Phoenix, Atlanta, Charlotte, Nashville, Chicago | $120-150/day | Strong construction demand with reasonable housing costs |
Secondary Markets | Smaller cities and towns | $90-130/day | Reduced cost of living, though specialized projects pay premiums |
Rural Areas | Remote project sites | $100-140/day | Often with company-provided housing; reduced cost of living |
State-Specific Considerations: Travel Time Pay vs. Per Diem
Before diving into state-specific rules, understand that travel time pay and per diem are two completely different forms of compensation – and mixing them up creates compliance problems.
Per diem reimburses daily living expenses (meals, lodging, incidentals) while workers are assigned to job sites away from home. It follows federal IRS guidelines and can be tax-free when structured correctly. This is what we’ve discussed throughout this article.
Travel time pay compensates workers for hours spent traveling as part of their job duties. It’s paid at their hourly rate (or a specified travel rate), counts as work time, and is subject to regular wage and hour laws – including overtime calculations.
While per diem follows federal guidelines with minimal state variation, travel time compensation is governed by state labor laws – and some states have significantly stricter requirements than federal standards. Two states with particularly specific rules are California and Washington.
Travel Time Pay for Construction Workers in California
California has some of the strictest travel time requirements in the nation. Under the California Labor Code, travel time must be paid if it occurs during the worker’s normal working hours – even on non-working days. Any travel from job site to job site during a workday must be counted as paid work time.
Key requirements for California contractors:
- Portal-to-portal exception doesn’t apply broadly. Unlike federal law, California requires payment for travel between job sites during the workday, not just the regular commute.
- Travel during normal hours counts. If a worker normally works 7am-3pm and travels on Saturday at 8am, that Saturday travel time is compensable because it falls within their typical work schedule.
- Long-distance travel triggers payment. When workers must travel significant distances for the employer, that travel time counts toward total work hours – affecting overtime calculations.
- Prevailing wage projects have additional rules. Public works projects under prevailing wage requirements may have specific travel allowance provisions that supplement standard travel time pay.
Travel Time Pay for Construction Workers in Washington
Washington State Department of Labor & Industries establishes clear rules: if travel is part of the workday or the employer mandates specific transportation or routes, that travel time is compensable.
Key considerations for Washington contractors:
- Job site to job site travel is paid time. Once workers arrive at the first location designated by the employer, subsequent travel between sites during the workday must be compensated.
- Employer-directed travel triggers payment. If the company requires specific transportation methods, meeting locations, or travel routes, that travel time is compensable – even if it’s before or after normal work hours.
- Multi-state projects need careful tracking. Workers traveling between Washington and other states for assignments must have travel time documented and paid according to Washington standards when applicable.
3 Costly Per Diem Mistakes Construction Companies Make
Per diem errors cost money through overpayment, recruitment challenges, or tax penalties. These three per diem mistakes appear most frequently across the industry.
Mistake #1: Using the Same Rate Everywhere
A national contractor pays $125 per day flat rate across all projects – Dallas, Denver, and San Francisco alike. They lose recruiting battles in high-cost areas because competitors pay $175-200 in those locations, while simultaneously overpaying in locations where $100 would suffice.
The cost: On a 50-person project team working 200 days, paying $25 extra per person per day in low-cost areas wastes $250,000 annually. Conversely, paying $50 too little in high-cost markets means positions go unfilled or require wage increases that cost even more.
The fix: Tier per diem by geographic region. Create 3-5 rate zones based on actual housing costs in markets where you work. Review annually and adjust as markets change.
Mistake #2: Not Requiring Expense Reports
A superintendent tells traveling workers, “We’re paying per diem, so don’t worry about documentation.” Workers assume it’s tax-free money; no expense reports get filed. Three years later, an IRS audit classifies all those per diem payments as taxable wages because there’s no substantiation of business purpose.
The cost: Back taxes, penalties, and accrued interest for both the company and employees. The company faces employment tax liabilities because those payments should have been processed through payroll withholding.
The fix: Implement a simple expense report process. Workers submit a weekly report showing dates, location, and project name. This takes 5 minutes but protects both parties. Make it part of the timesheet submission – no expense report, no per diem payment.
Mistake #3: Continuing Per Diem Beyond One Year
A hospital renovation extends to 15 months. The same crew stays on site for the duration. The company continues paying per diem the same way it did for months 1-12, not realizing that once a project exceeds one year, per diem becomes taxable.
The cost: IRS considers all per diem after month 12 as taxable wages. The company should have been withholding taxes. Fixing this retroactively creates accounting nightmares and potential penalties.
The fix: Track project duration and worker assignments carefully. For projects approaching 12 months, plan for either rotating crews or converting per diem to taxable wages with appropriate withholding. Some companies establish rotation policies specifically to avoid this issue – nobody works the same site longer than 12 months.
These mistakes share a common theme: unclear policies and poor documentation create problems. Like incomplete time tracking that leads to payroll disputes, per diem errors are expensive but preventable through systematic approaches.
How to Manage Per Diem Efficiently: Best Practices
Effective per diem management requires clear policies, consistent enforcement, and integration with time tracking systems. These four practices reduce errors and administrative burden.
Create Written Per Diem Policies
Document everything: who qualifies for per diem, how rates are determined, what expenses it covers, documentation requirements, and payment timing. This written policy serves three purposes:
First, it gives project managers clear guidelines for approving per diem. No more case-by-case decisions that create inconsistencies.
Second, it provides legal protection. When policies are documented and applied consistently, the company has evidence that it followed an accountable plan for IRS purposes.
Third, it helps with recruiting. When a skilled worker asks about per diem, the hiring manager can point to the written policy rather than making vague promises.
The policy should address eligibility criteria, rate structure, covered expenses, documentation requirements, payment schedule, and situations that disqualify per diem.
Use Federal Rates as Your Foundation
Even if you adjust from federal rates, start with GSA rates as the baseline. This ensures you’re in the right range for tax-free treatment and provides an objective reference point for internal discussions about rate changes.
Review GSA rates annually when they’re updated each October. Major shifts in high-cost area designations happen occasionally – cities that weren’t high-cost areas may become designated, or vice versa.
Require Simple Documentation
Implement an expense report system, but keep it simple. Workers should submit a weekly or bi-weekly report showing dates worked, project name and location, business purpose, and days traveling vs. working vs. off.
This takes 5 minutes to complete and 2 minutes to review. Modern construction time tracking software or simple spreadsheet templates make this easy to track. See how SmartBarrel makes Per Diem easy – request a demo today.
Don’t require detailed receipts for per diem itself – that defeats the purpose. Per diem exists specifically to avoid receipt collection.
Track Assignment Duration
Per diem rules depend on whether an assignment is temporary or effectively long-term. Contractors should monitor how long workers remain on the same project so tax-free per diem doesn’t continue past allowable thresholds.
Many companies use payroll or project controls to track worker start dates, expected project duration, and upcoming milestones. Reviewing assignments as they approach the one-year mark helps prevent compliance mistakes when projects extend unexpectedly.
When timelines change, contractors may need to adjust per diem treatment, rotate crews, or transition payments to taxable status with proper withholding.
Strong per diem management comes down to the same fundamentals as certified payroll compliance: clear policies, consistent documentation, and reliable jobsite records that support decisions before they become audit issues.
Conclusion: Managing Per Diem Effectively Starts with Clear Processes
Per diem isn’t just another line item – it’s a strategic tool for recruiting workers, simplifying operations, and staying tax-compliant. Get it right, and you gain a competitive edge. Get it wrong, and you face tax penalties, budget overruns, and recruiting disadvantages.
The essentials are straightforward: understand IRS rules around tax homes and temporary assignments, use GSA rates as your baseline, document everything with simple expense reports, and track assignment duration to avoid the one-year threshold.
But here’s what the IRS really cares about: Can you prove it?
When audited, they want systematic proof of which workers were on which jobsites, for how many consecutive days, with precise dates and times. The contractors who handle per diem best aren’t working harder – they’re capturing this data automatically alongside their workforce tracking.
Want to see how systematic time tracking eliminates manual per diem documentation?
SmartBarrel captures worker locations, duration, and assignments in real time – giving you audit-ready proof for per diem, certified payroll, and job costing simultaneously.
Frequently Asked Questions About Per Diem in Construction
Can independent contractors or 1099 workers receive per diem?
Independent contractors typically cannot receive tax-free per diem from clients. Unlike W-2 employees, 1099 contractors are self-employed and must handle their own business expenses. They can deduct travel expenses on their tax returns using either actual expenses or per diem rates, but payments from clients are generally considered taxable income.
What happens if a worker moves between multiple job sites in one week?
When workers travel between multiple locations within a week, per diem applies based on where they’re staying overnight. If they return home each night, no per diem is owed. If they stay in different cities, apply the appropriate GSA rate for each location. Track each location separately for accurate payment and tax compliance.
Can construction companies pay per diem in advance?
While some companies pay per diem weekly in arrears with regular payroll, advance payments are permissible under IRS rules as long as workers submit expense reports afterwards, substantiating the business purpose. However, any excess amounts not substantiated must be returned to the employer. Most contractors avoid advance payments to simplify accounting and ensure compliance.
What if actual lodging costs exceed the per diem rate?
When hotel costs in a location exceed the GSA per diem rate, companies have two options. They can pay the standard per diem and require workers to cover the difference (which may hurt recruitment), or they can pay actual expenses with proper receipts and documentation.
Some contractors use a hybrid approach: pay the GSA lodging rate as standard per diem, but allow workers to submit receipts for reimbursement when actual costs exceed the federal limit. This protects workers from out-of-pocket expenses in genuinely expensive markets while maintaining tax compliance through proper documentation.
