Per diem is one of those topics in construction payroll that tends to get handled informally until it becomes a problem. Many contractors have been paying field workers travel allowances for years without a written policy in place, without checking their amounts against federal rate tables, and without collecting the documentation the IRS requires for the payment to be treated as non-taxable. The arrangement works until something changes: a new project triggers a certified payroll review, an audit surfaces undocumented payments, or a departing worker files a wage claim.
The disputes that result are rarely about intent. They are almost always about practices that were never formalized and documentation that was never collected. Understanding where the rules actually sit, and where construction companies most commonly fall short, is the starting point for getting ahead of the problem.
Per diem in construction covers lodging, meals, and incidental expenses when workers are assigned away from their home area for a project. The term is used loosely across the trades, but the compliance mechanics vary depending on how the payment is structured, how it is documented, and whether it falls within the rate thresholds the IRS recognizes as non-taxable. Understanding
Understanding what is per diem in construction is foundational before evaluating whether a company’s current practices are compliant, because the same payment can be treated very differently depending on how it is structured.
The Federal Rate Framework
The U.S. General Services Administration publishes per diem rates annually for locations across the continental United States. These rates establish the threshold at which payments to employees remain non-taxable under IRS rules. Payments that meet the GSA rate and are properly substantiated are generally excluded from taxable wages. Payments that exceed the rate, or that lack adequate documentation, become taxable income for the worker and increase employer payroll tax obligations. The GSA per diem rate database is the authoritative source for current allowable amounts by location, and rates vary significantly depending on where the work is being performed.
For fiscal year 2025, the GSA raised the standard continental U.S. lodging rate to $110 per night, while the standard meals and incidentals rate increased to $68 per day. High-cost localities carry higher allowances. A contractor paying a flat per diem amount to all workers regardless of project location may be over the allowable rate in some areas without realizing it, which exposes both the company and the worker to tax liability on the difference. That exposure compounds across a large crew over a long project duration.
Contractors who use a single company-wide flat rate should audit that rate against the GSA schedule for each location where they are currently active. A rate that was compliant in Phoenix may be over the threshold for a project in a high-cost metro, and that difference is not automatically flagged by payroll systems that lack location-based logic.
The Accountable Plan Requirement
For per diem to be treated as non-taxable, the IRS requires that it be paid under what is called an accountable plan. This means three conditions must be met. The expense must have a legitimate business connection. The employee must substantiate the expense with documentation of time, place, and purpose. And any payment that exceeds actual expenses must be returned within a reasonable period. The IRS outlines these requirements in Publication 463, Travel, Gift, and Car Expenses, which is the primary reference document for contractors and payroll teams working through per diem compliance.
The substantiation requirement is where many construction companies fall short in practice. On active jobsites with large, mobile crews, collecting individual expense reports with dates, locations, and business purpose statements for every worker every week is genuinely difficult. The temptation is to pay a flat amount and skip the documentation. That approach converts per diem from a non-taxable reimbursement into taxable wages by default, with corresponding payroll tax consequences for the employer.
A practical documentation approach for field crews does not need to be complex. A simple standardized form capturing the worker’s name, assignment location, dates of travel, and daily rate paid is generally sufficient for substantiation purposes. The form does not need to be lengthy. It needs to exist, be consistently collected, and be retained with payroll records.
Per Diem and Certified Payroll
For contractors working on prevailing wage projects, the per diem question gets more complicated. Certified payroll reports require disclosure of all compensation paid to covered workers, including per diem payments. If per diem is taxable because the company is not operating under a compliant accountable plan, it must be included in gross wages on the certified payroll report. Contractors who exclude taxable per diem from their certified payroll submissions are misrepresenting wage data on a federal compliance document, which carries its own category of risk separate from the payroll tax issue.
Union contractors face an additional layer of complexity. Many collective bargaining agreements address how per diem is treated, and some union contracts prohibit reporting per diem as taxable wages on workers’ W-2 forms. For contractors bound by CBAs, the per diem policy needs to align with both the union agreement and the IRS accountable plan rules, which do not always point in the same direction. Where a conflict exists, the contractor should get clarity from legal counsel before adopting a practice that satisfies one requirement at the expense of the other.
The 12-Month Assignment Rule
One of the most consistently overlooked aspects of per diem compliance in construction is the 12-month rule. Under IRS guidelines, if a worker’s assignment at a single location is expected to last more than one year, or actually does last more than one year, that location is considered the worker’s tax home. Per diem paid after that threshold has been crossed is generally treated as taxable compensation, not a non-taxable travel reimbursement.
For specialty contractors with long-duration projects, this rule can convert a compliant per diem arrangement into a taxable one partway through the job without any change in the documentation practices. The payment looks the same. The paperwork looks the same. But the tax treatment has shifted. Payroll teams need to track assignment durations and adjust the treatment of per diem when a worker’s assignment is expected to exceed or has already exceeded the 12-month mark.
Multi-State Projects and Jurisdictional Complexity
Contractors operating across multiple states face an additional layer of complexity. Some states have their own guidance on when travel stipends are taxable, and those rules do not always mirror the federal framework. A per diem structure that is fully compliant under IRS rules may still trigger state-level tax withholding obligations in certain jurisdictions.
For contractors running crews in multiple states simultaneously, maintaining a per diem policy that accounts for both federal and state requirements by location is the responsible approach. It requires knowing the applicable rules for each state where work is performed, which changes as new projects are won and existing ones close. Building that review into project setup, rather than treating it as a back-office task, reduces the likelihood of compliance gaps accumulating undetected.
Building a Per Diem Policy That Holds Up
Contractors who consistently avoid per diem disputes share a few common practices. They have a written policy that specifies when per diem applies, what documentation is required, and at what rates payment is authorized for each project location. They check GSA rate tables by project location before approving payments rather than using a single company-wide flat rate. They collect substantiation forms from covered workers on a consistent schedule. And they track assignment durations to monitor for the 12-month threshold.
None of this is administratively burdensome when it is built into the project setup process. The disputes that surface around per diem are almost universally the result of informal practices that were never documented. The fix is straightforward: write it down, apply it consistently, keep the records. That discipline, applied from the start of each project, is the difference between per diem that works cleanly and per diem that creates problems when someone looks closely.
