How to Determine Contractor Per Diem Rates

Because the nature of contracting often requires contractors to live somewhere other than their permanent residence, those contractors can incur additional expenses most employees don’t have. In those cases, the contractor may be offered a daily “per diem” rate to help them cover those expenses. This is Part 2 of a three-part series examining the guidelines surrounding the payment of per diem. Don’t miss Part 1 and Part 3. 

There are two common methods that can be used to determine a contractor’s per diem rate: The High-Low Substantiation Method and the Per Diem Substantiation Method (CONUS Tables)

The High-Low Substantiation Method

This is the method Top Echelon Contracting uses most often to determine per diem rates for its employees. In this method, the IRS sets a standard or “low” daily rate that applies to most localities and a “high” rate for large cities that generally have a higher cost of living, such as Boston, New York City, and San Francisco. The rates change annually. According to the IRS’ Publication 1542 on per diem, the “low” rate is currently $163 per day and the “high” rate is $258 per day.

In some situations, the contractor meets the IRS guidelines for the Meals and Incidentals (M&IE) portion only. Below is a list of situations that MAY allow the M&IE payment under IRS guidelines. The high-low amount for M&IE is $52/day for low-cost localities ($6.50/hr) or $65/day for high-cost localities ($8/13/hr). Generally speaking, a contractor will be entitled to M&IE when his/her work duties require him/her to be outside of the general area of his/her tax home substantially longer than an ordinary workday and/or alternative lodging is required.

For example, the M&IE portion only would be paid if:

• The client provides the lodging or reimburses the contractor directly for lodging.
• The contractor does not expect lodging expenses to be incurred, but will be away from his/her tax home longer than a standard workday. (i.e. – staying with family members)
• (Isolated Cases) If the standard work-day is consistently exceeded and it would be unreasonable to have the contractor return to his/her tax home.

Per Diem Substantiation Method (CONUS Tables)
Employers can instead choose to use the CONUS Tables, which are published by the General Services Administration (GSA) branch of the Federal government and give specific rates for specific localities. The rates in the tables are listed by state, city and sometimes county. They are also broken down by a Maximum Lodging Rate, Meals and Incidental Rate, and a Total Maximum Per Diem Rate by day. The CONUS Tables are updated annually on October 1st. There are also additional tables for per diem rates outside the continental U.S. (CONUS Table) and for non-U.S. overseas locations (FOREIGN Table).

Our next blog post in this series will focus on some of the most frequently asked questions about per diem.

This article is for informational purposes only and should not be considered legal or financial advice.