How Does Per Diem Work in California? Reimbursement, Taxes, Overtime

Per diem in California is a flat daily allowance your employer pays to cover lodging, meals, and incidental expenses while you travel for work. It is one of the main ways employers meet their legal duty to reimburse business costs, and whether it shows up as taxable income on your W-2 depends on how the plan is structured. The daily amounts most California employers use come from the federal General Services Administration, and the tax rules come from the IRS.

Your Employer’s Underlying Duty to Reimburse You

California Labor Code Section 2802(a) requires every employer to reimburse employees for all necessary expenses they incur doing their job or following the employer’s instructions.¹ The statute does not dictate a method. An employer can reimburse actual receipts, pay a per diem, or combine the two. What matters is that whatever system is used fully covers your real costs.

That rule has a direct consequence for per diem. If the daily allowance falls short of what you actually spent on legitimate business expenses, your employer owes you the difference, even when the per diem matches the federal GSA rate.¹ A per diem is a convenience, not a cap on your right to be made whole.

If you have to go to court or the Division of Labor Standards Enforcement to collect, Section 2802(b) adds interest from the date you first paid out of pocket, and Section 2802(c) lets you recover attorney’s fees.¹

How the Daily Amount Is Set

Most California employers pin their per diem to the rates published each federal fiscal year (October 1 through September 30) by the GSA. Those rates split into a maximum lodging allowance and a meals and incidental expenses (M&IE) allowance, and they vary by destination.²

For fiscal year 2026, the standard CONUS rate (the default for any location not individually listed) is $110 for lodging and $68 for M&IE, totaling $178 per day.³ California’s cities generally run higher. Los Angeles, for instance, carries a $191 lodging rate and $86 M&IE, bringing the day to $277, with San Francisco and San Diego lodging caps typically higher still.⁴

Employers are not required to use GSA figures. Many do because the numbers are defensible if an employee later argues the amount was too low, and because staying at or below the GSA rate keeps the tax treatment simple.

The IRS High-Low Shortcut

Rather than looking up each city, some employers use the IRS high-low method, which sorts every CONUS destination into two tiers. For travel on or after October 1, 2025, the high-cost rate is $319 per day ($86 M&IE) and the standard rate is $225 per day ($74 M&IE).⁵ Los Angeles, San Francisco, and San Diego typically land in the high-cost tier. An employer that chooses this method has to apply it consistently to all employees for the calendar year.

When Per Diem Is Tax-Free and When It Is Not

The IRS treats per diem as tax-free only when it is paid under an “accountable plan.” Three conditions have to be met:

Business connection. The expense relates to services you performed as an employee.
Substantiation. You account to your employer for the date, location, and business purpose of each trip.
Return of excess. You give back any per diem that exceeds your substantiated expenses within a reasonable time.

The regulation gives safe harbor deadlines for what counts as reasonable. You generally have 60 days after incurring an expense to substantiate it and 120 days to return anything extra. If your employer sends periodic statements asking for substantiation at least quarterly, you have 120 days from the statement date to respond.⁶

When those conditions are met and the per diem does not exceed the applicable GSA rate, the full payment is excluded from your gross income and from income tax withholding and payroll taxes. Pay above the GSA rate is taxable wages and must appear on your W-2.⁶ If your employer simply hands you a flat daily amount without requiring any proof of travel or business purpose, the entire payment is taxable because it fails the accountable plan test.

Long Assignments: The One-Year Rule

Per diem tax benefits disappear when an assignment stops being temporary. The IRS treats an assignment at a single location as temporary only if it is realistically expected to last one year or less and in fact does. If the expected duration is longer than a year, the assignment is “indefinite,” that location becomes your tax home, and any per diem you receive is taxable income even if you substantiate it. A trip that began as temporary can flip to indefinite midway through. If a six-month project gets extended to 18 months, per diem becomes taxable from the moment you could reasonably expect the assignment to exceed one year.⁷

Partial Travel Days and Provided Meals

Trips rarely line up with the calendar. Under the federal standard most employers follow, the first and last calendar days of a trip are reimbursed at 75 percent of the applicable M&IE rate; full travel days get 100 percent.⁸ On a Los Angeles trip with an $86 M&IE, the first and last days are each capped at $64.50.⁴

When a meal is provided (say, lunch at a conference), employers can prorate using the GSA’s meal breakdown. At the $86 M&IE level, breakfast counts for $22, lunch $23, dinner $36, and incidentals $5.⁹ The reduction applies when a meal is actually provided or included in a registration fee, not when you decide to skip it on your own.

When Per Diem Counts Toward Overtime

California overtime is paid at 1.5 or 2 times your “regular rate of pay,” and what belongs in that regular rate often becomes a fight. Under the federal Fair Labor Standards Act, reasonable payments for travel expenses incurred in the employer’s interest are excluded from the regular rate.¹⁰ The exclusion only holds when the payment genuinely reimburses expenses rather than functioning as extra compensation.

The Ninth Circuit’s 2021 decision in Clarke v. AMN Services, LLC drew the line. AMN, a healthcare staffing company, paid traveling nurses a per diem but reduced it when nurses missed shifts, offered a “banking hours” system that tied the per diem to hours worked, and paid the same per diem to nurses who did not travel at all. The court held those payments functioned as compensation and had to be folded into the regular rate for overtime.¹¹

The warning signs courts look for:

The per diem drops when you work fewer hours or miss a shift.
Employees who sleep at home get the same per diem as those in hotels.
The amount bears no reasonable relationship to actual travel costs.
The company markets the combined hourly wage and per diem as “weekly pay” to recruit candidates.

When a per diem is reclassified as wages, the employer has to recompute the regular rate with the per diem included and pay overtime on that higher figure, plus any penalties for the shortfall.¹¹

What Per Diem Does Not Cover

Per diem covers lodging, meals, and incidentals (tips for service staff, small transportation items like baggage fees). It does not cover airfare, car rentals, mileage on your personal vehicle, conference registration, or other major trip costs. Those are handled through separate reimbursement. Personal expenses such as entertainment or gifts are excluded entirely.

If you incur a necessary business expense outside the per diem categories, your employer still has to reimburse it separately under Section 2802. Per diem replaces daily subsistence costs, not every cost of a business trip.¹

Records That Protect You

The tax-free status of per diem rests on documentation. For each trip, keep a record of the dates, the city or cities visited, and the business purpose. Many employers run expense software that captures this automatically; if yours doesn’t, a simple travel log is enough and will matter in an IRS audit or a dispute with your employer.

If you get more per diem than you actually spent, the accountable plan rules require you to return the surplus within 120 days of incurring the expense, or within 120 days of your employer’s periodic statement.⁶ Failing to return the excess converts it into taxable income. If your real costs ran higher than the allowance, hold on to the receipts: those are what you need to collect the additional reimbursement California law entitles you to.

1
California Legislative Information. California Labor Code Section 2802
2
U.S. General Services Administration. Per Diem Rates
3
Federal Register. Maximum Per Diem Reimbursement Rates for the Continental United States (CONUS)
4
U.S. General Services Administration. FY 2026 Per Diem Rates for California
5
Internal Revenue Service. Notice 25-54 – Special Per Diem Rates
6
eCFR. 26 CFR 1.62-2 – Reimbursements and Other Expense Allowance Arrangements
7
Internal Revenue Service. Publication 463 – Travel, Gift, and Car Expenses
8
eCFR. 41 CFR Part 301-11 – Subsistence Expenses
9
U.S. General Services Administration. M&IE Breakdowns
10
Office of the Law Revision Counsel. 29 U.S. Code 207 – Maximum Hours
11
Justia Law. Clarke v. AMN Services, LLC, No. 19-55784 (9th Cir. 2021)