Per diem tax rules for electrical contractors

Per diem stays tax-free for your electrician when three things are true: he's away from his tax home overnight on a job expected to last a year or less, you pay it under an accountable plan, and the daily amount is at or under the federal rate. Pay more than the federal rate and the excess goes in box 1 of his W-2 as wages. Cut his wage and call the difference per diem, and all of it is wages. The rules are in IRS Publication 463.

This is the general federal rule. State tax rules can differ, so run your plan by your tax pro before the first check goes out. Where per diem fits in the whole offer is in how much to pay a journeyman electrician in 2026.

01Test 1: Is he away from his tax home?

Per diem is only tax-free for a hand who is traveling away from his tax home.

Publication 463 says your tax home is generally "your regular place of business or post of duty," not necessarily where your family lives. For a traveling journeyman with no regular shop, it's usually the home he keeps and pays for and comes back to between jobs.

Two cases where it doesn't work:

• The itinerant hand. A man who follows work and keeps no regular home has no tax home to be away from. The IRS treats his home as wherever he's working, so travel pay to him is wages.
• The local hand. A man who lives near the job isn't traveling, even if you call it per diem.

02Test 2: Does he have to stay overnight?

He has to be away long enough to need sleep or rest, and a long drive home every night doesn't count.

Pub 463 says the trip has to be substantially longer than an ordinary day's work and long enough that he needs sleep or rest to meet the demands of the job. It also says that rest "isn't satisfied by merely napping in your car."

So the hand who drives 90 miles each way and sleeps in his own bed doesn't qualify for tax-free per diem. If you want to help him, pay mileage or a higher rate, and put it on the W-2.

03Test 3: The one-year rule

A job expected to last more than a year at one location is not temporary, and per diem on it is taxable from day one.

The IRS Office of Chief Counsel spelled it out in Information Letter 2019-0003:

• An assignment in a single location that is "realistically expected to last (and does in fact last) for one year or less" is temporary. Per diem can be tax-free.
• If it's expected to last more than a year, it's indefinite from the start, "regardless of whether it exceeds one year."
• If it starts out expected to run a year or less and later is expected to run longer, it's temporary only "until the date the taxpayer's expectation changes." From that date, his tax home moves to the job.

The letter also says the IRS can't waive the rule. It's in Section 162(a) of the tax code, so it would take Congress to change it.

In the trade, the risk is the job that keeps rolling. One national electrical contractor told us they needed hands "for at least three months." A three-month job is well inside the rule. A data center campus where Phase 1 rolls into Phase 2 at the same site is where hands cross the line without anyone noticing. Write the expected length in the offer, and recheck it every time the schedule moves.

04Test 4: The three accountable plan rules

Your per diem has to be paid under an accountable plan, which has three rules (Pub 463, chapter 6):

1. Business connection. It covers expenses he has while working for you.
2. He accounts for it within a reasonable period.
3. He returns any excess within a reasonable period.

The IRS safe harbors for "reasonable period" are:

• An advance paid within 30 days of the expense.
• Accounting within 60 days after the expense.
• Excess returned within 120 days after the expense.
• Or a periodic statement at least once a quarter, with 120 days to account or pay back.

With a per diem, he doesn't hand you hotel and meal receipts. He's treated as having accounted for the amount when you limit payments to ordinary and necessary travel, the allowance is not more than the federal rate, he proves the time (dates), place and business purpose, and he isn't related to you. In practice, a signed timesheet showing the job address and the days he was there covers time, place and purpose. Family members and part owners of the company follow tighter rules.

05At or under the federal rate vs over it

Under the federal rate, the per diem stays off box 1. Over it, the excess is wages.

• At or under the federal rate: not included in box 1 of the W-2. No withholding, no FICA.
• Over the federal rate: the federal-rate amount goes in box 12 with code L. The excess goes in box 1 as wages, with withholding and FICA.
• Hotel provided: when you provide the lodging or pay the hotel directly, the cash allowance is treated as meals and incidentals only, so the federal M&IE rate is the limit (Rev. Proc. 2019-48). The same goes for a per diem figured like wages, by the hour.

The federal rate is the GSA rate for the job's county. For FY2027 (starting Oct 1, 2026), the standard rate is $113 lodging plus $68 M&IE, $181 a day (GSA). You can also use the IRS high-low method, which in Pub 463 (2025) was $319 a day for high-cost areas and $225 for everywhere else. Those high-low numbers are reset by IRS notice each fall, so pull the current one before you use it.

How much per diem to offer in the first place is covered in what per diem to offer traveling electricians.

06A sample week, four ways

This is an example, not tax advice. Say you hire a journeyman at $48 an hour for a job in Columbus, Ohio (Franklin County), expected to last five months. He keeps his house 300 miles away and stays at the job on weekends. He works 6-10s. The FY2027 GSA rate for Franklin County is $138 lodging plus $80 M&IE, $218 a day.

His wages are the same in the first three cases: 40 hours at $48 ($1,920) plus 20 overtime hours at $72 ($1,440), $3,360.

A is clean. Under the limit, none of it shows in box 1.

B pays $224 over the limit. That $224 is wages: withhold on it and pay FICA on it.

C is the hotel-provided case. Since you pay the room, only $80 a day of M&IE is tax-free. $100 a day cash puts $20 a day, $140 a week, into wages.

D is the trap. Say instead you drop him to $38 an hour and pay "$10 an hour per diem" for all 60 hours ($600). Pub 463 says an arrangement that repays expenses "by reducing the amount reported as your wages" is treated as a nonaccountable plan, so the full $600 is wages in box 1. It also shorts his overtime if the Labor Department sees the $10 as wages. You paid $1,520 straight time, $1,140 overtime at $57 and $600 "per diem," $3,260. On a $48 regular rate he was owed $3,360. That's $100 a week short, per man, before back taxes.

The overtime rule is in 29 CFR 778.217: a travel payment stays out of the regular rate only if it "reasonably approximates the expense incurred." If it's disproportionately large, the excess counts toward overtime. A payment at or under the federal rate is per se reasonable.

07What to keep on file

If you're ever audited, these are what make the plan hold up.

1. A written per diem policy: who qualifies, the daily amount, how days are counted.
2. The offer letter with the job location and expected length.
3. Each hand's permanent address, and a note that he keeps it.
4. Daily timesheets with the job address.
5. Payroll coded right: box 12 code L for the federal-rate amount when you pay over it, box 1 for any excess.
6. A monthly check on expected job length, with the date any hand's expectation crosses one year.

Per diem is one piece of the hiring rules contractors trip on. The rest are in hiring law basics for electrical contractors, and keeping a road crew together is in how to recruit and keep a traveling electrical crew.

If you're staffing a travel job and short on licensed hands, apply here and we'll see if we can put 5 licensed electricians in front of you in 14 days.

FAQFAQs