When you pay per diems to employees working away from home, the IRS says 40 percent of that amount is considered meals, which, for tax purposes, is usually only 50 percent deductible.

Suppose you have 150 employees working at various job sites away from your business base. You pay them a per diem of $50 a day for 200 days, for a total of $1.5 million.  The IRS considers $600,000 of that amount to be for meals. One-half of the meal portion, or $300,000, is nondeductible, which translates to about $120,000 in federal and state taxes.
Negotiating agreements with your employees to pay only the lodging portion of their expenses doesn’t improve your tax situation. The IRS still considers 40 percent of that per diem to be for meals.

There are three possible alternatives to this taxing problem:

1. Reimburse your employees on an expenses basis. Per diem payments that match the federal rate are acceptable in lieu of receipts. Switching your payment system to an expenses basis means you reimburse from invoices. Therefore, if meals are only 30 percent of the total cost, you only deduct 50 percent of that amount. Your employees, however, may not favor the switch. First, they’ll have to keep track of receipts. Second, they’ll have to pay expenses out of their pockets and wait to be reimbursed.
2. Pay lodging costs directly. Negotiate arrangements with local hotels and pay the bills from headquarters. One contractor we know has taken a slightly different spin on this plan. The company buys houses near job sites. When the projects are finished, the contractor owns real estate that it can hold for equity or sell.
3. Increase employees’ wages to cover the costs of lodging and meals away from home and make them responsible for paying the bills. The contractor gets to take a 100 percent deduction, but the employees pay tax on the additional income and may or may not be eligible to deduct it as unreimbursed business expenses.

These solutions only apply to non-union shops. Union contracts typically mandate set per diem amounts. You’ll have to wait until it’s time to renegotiate the contract to bring the topic up.